Model N, Inc.
Q2 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Greetings, and welcome to Model N's second Quarter 2021 Earnings Conference Call. . As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Gwyn Lauber, Director of Investor Relations. Thank you. You may begin.

[Gwyn Lauber:]

Good afternoon. And welcome to the earnings call for Model N's second Quarter Fiscal Year 2021, which ended on March 31, 2021. This is Glenn 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; Rubin Gallegos, Vice President of FP&A and IR; and Cathy Lewis, Chief Accounting Officer.

[Jason Blessing:]

Thanks, Glenn, and good afternoon, everyone. Thank you for joining our call. Today, I'm pleased to share highlights for Model N's second quarter. Looking back over the last year, I am amazed at how much progress Model N and our customers have made despite the challenging environment. I am proud of the positive impact our customers have had fighting the pandemic and helping us deal with these challenging times. And we are humbled to have played a small part in their efforts. I am once again happy to report that our quarterly results exceeded our expectations. Our success this quarter was driven by a healthy mix of large SaaS transitions, customer expansions and new logos from both high-tech and life sciences. Our professional services team, despite being remote, also continues to execute well on project delivery and is playing a critical role in moving our customers to the cloud. Today, I will provide more detail on our business. Plus, I will share some market insights that we revealed at our recent customer event as well as some perspective on the rest of the year before turning it over to John.

[John Ederer:]

Thank you, Jason, and good afternoon to everyone on the call. As Jason highlighted, we continue to execute well on our key growth drivers. The impact can be seen in our Q2 results, which exceeded our expectations on every metric. Certainly large SaaS transitions, such as J&J last quarter and Novartis this quarter are having a positive effect on both subscription and professional services revenue. And we are also seeing the other elements of our strategy beginning to have an impact, including customer expansions with products like validata and channel data management, the addition of business services, the development of our new logo sales team and the extension of our business in Europe. Now looking specifically at our results for the second quarter, total revenue grew 21% to $48.2 million, including $6.5 million of revenue from business services. Subscription revenue grew 24% to $35.9 million, and Professional Services revenue grew by 12% to $12.3 million. These results exceeded our guidance for the quarter with the over performance driven by the earlier timing of subscription bookings as well as strong utilization on professional services.

[Operator:]

. Our first question comes from the line of Joe Vruwink with Baird.

[Joseph Vruwink:]

I wanted to start with the Deloitte Business Services business. The contribution in the quarter both better revenues and also a narrower operating loss better than at least we were bottling it in the quarter. And I'm wondering I think the lower OpEx you explained well. I'm more curious on maybe the revenue front? And what areas of the business maybe just being tied in more closely to the Model N sales team help, but what areas of the business may be delivered top line upside? And do you have any sense of what maybe revenue synergies ultimately could be achieved over the next 12, 18 months?

[Jason Blessing:]

Joe, it's Jason. So yes, we're very pleased with the first quarter and how things are going. As you pointed out, we were able to accelerate synergies in several areas on the expense side, particularly in areas of hosting and some of the software contracts. And then on the second part, just kind of the overall demand for the business. This transaction has generated considerable interest with our existing customers and prospects, and that's why we've integrated our sales forces. So we've just got better coverage and have a better opportunity to serve this market and allow us to fully capitalize on the opportunity over the next 2 to 3 years.

[Joseph Vruwink:]

And then just going back to some of the findings in the state revenue report and maybe interweaving the interest you're seeing in the specific category and then some of the other comments from the third parties just about cloud applications getting wider appeal, more interest across both biotech and pharmas. Are there things that you're seeing particular interest in? I think 1 of the findings is that biotechs are thinking a little more proactively about getting these solutions up and running. Maybe with an earlier timetable associated or just being more mindful of what they need as they launch a commercial operation. That would seem to be well aligned with what Deloitte traditionally did well. But I'm curious if there are other specific areas given the studies you've done, studies third parties have done that seem to be really benefiting your business and kind of where the key priorities are for customers this year?

[Jason Blessing:]

Yes, Joe, I think in 1 of your notes, you might have also cited the IDC report that we referenced as well, and Gartner has written some similar reports. And it certainly comes back to a combination of the things that we saw in our report as well with just regulatory complexity continuing to go up and Model N being able to simplify that for our customers. And then I think, as we've talked about in the past, I think this is an industry that had been late to adopting cloud and the pandemic and work from home, I think, has really accelerated the cloud-first mindset and digital transformations, which, of course, we benefit from both of these topics -- or excuse me, from both of these trends. The other thing I would say we continue to strength in is just -- is med tech in general, and it's 1 of the areas that we've been investing in from a product perspective. And we see them continue that segment of the industry continue to invest and modernize along with their pharma, brothers and sisters. I leave it there.

[Operator:]

Our next question comes from the line of Ryan MacDonald with Needham & Co.

[Ryan MacDonald:]

And congrats on a nice quarter here, Jason. First question is around the SaaS transition. You mentioned that 1 of the customers that started the transition during the quarter also included validated cloud offering. Just curious if you're seeing a shift in the conversations at all or the adoption activity as you're going through these transitions from customers that are simply just focused on the transition to customers now thinking more strategically not only transitioning, but then taking the transition opportunity to continue to expand with Model N.?

[Jason Blessing:]

Yes. It's a great question, Ryan. That is certainly a pattern that's been emerging over the last couple of quarters, particularly as we get to some of our larger customers. They're not willing to upgrade to the cloud just for better economics. They have to see additional business value and so that's been -- that's opened an opportunity for us to get in and pitch some of the other products that customers historically have not used. It's, I think, going to be increasingly a catalyst for cross-sells and upsells. Validata is one that generates a lot of interest, our intelligence cloud offerings generate a lot of interest. And then things that we couldn't necessarily do as well in the on-premise model like offering enhanced support offerings are another thing that's emerged. So I think when history is written, we'll look back and say, SaaS transitions were a great thing for us and our customers because of the incremental economics it created, but also because it was a catalyst for cross-sell and up sell.

[Ryan MacDonald:]

Excellent. And for my follow-up question, Jason, you've done a really great job over the past couple of years since you joined the company of building out a strong go-to-market motions, particularly we're driving improved results with the direct sales force. So was interested to see sort of post the quarter close over the last few weeks here, the announcement of your partnerships with Channel Nomex in the high-tech area and global pricing innovations on the life sciences vertical. Can you talk about how you expect these indirect channels to start to contribute to a motion that you've sort of already, I guess, mastered within some of these end markets?

[Jason Blessing:]

Yes, there's really two types of partnerships -- well, 3 types of partnerships that we're looking to drive. The first is on the SI front. And these big digital transformations that Model N is helping to drive many of these companies a great catalyst to get more engaged with big 5 consulting firms and some of the other players in our ecosystem. Global price innovations is an example of a solution partnership where we have 2 products that are very complementary together and allow us to be more competitive in the marketplace and drive more value for our customers. So you can expect to continue to see those. And then yes, channel Nomex is the most recent example in high-tech of us partnering more with an influencer that is in accounts before customers even think about buying software. And we think that can be an interesting partnership where that type of partnership can be interesting for us as well.

[Operator:]

Our next question comes from the line of Jackson Ader with JPMorgan.

[Jackson Ader:]

The first one is on the business services, the Deloitte business, right, and the upside in the quarter. I'm just curious how much of that was do you think due to that business just simply performing better, independent of Model n? Or how much of that business upside came from -- like you talked about just being ahead of schedule on a few integration aspects?

[Jason Blessing:]

Yes. Jackson, it's a combination of all those things. When we issued guidance last quarter, we were just getting post-merger integration kicked off and wanted to make sure we gave thoughtful guidance on this business, both for the quarter and how it would contribute for the rest of the year. And I think as we've gotten into it and seen the opportunity to combine our sales forces, the interest that we're seeing from customers and prospects, that's driving some of the top line performance. And then quite honestly, the expense upside was a pleasant surprise. We were expecting some pretty thorny negotiations with some of the vendors that we had to assume the contracts and that is going much better than expected. So it was really a combination of things that came together in the upside.

[Jackson Ader:]

That's great. And then a follow-up for John. On the SaaS revenue side. So first, how much was SaaS revenue in the quarter? And then just can we clarify why would -- I understand that when someone announces or goes to the cloud makes a SaaS transition, there's some pull forward in revenue. But on a go-forward basis, why would the J&J SaaS transition make revenue recognition as we move forward less steady?

[John Ederer:]

Yes. Well, so it doesn't necessarily I make it less steady, it's just the fact that some of that got pulled up into Q1. And so if you think about a deal, typical ACV deal, and you recognize it all ratably over a period of time, if you alter that by recognizing more of it upfront that just leaves you with less for the subsequent quarters. So that's the kind of the simple short answer on the J&J side there.

[Jackson Ader:]

Got you. And then how much the SaaS revenue in the quarter?

[John Ederer:]

Yes. So if I look at that -- and this is, frankly, a metric that we probably need to reevaluate in light of the acquisition of Deloitte & The inclusion of Business Services. But if I give you the comparable metric to what we talked about last quarter, I think last quarter, we said that was up about 19% this quarter. We were up about 8% on an organic basis.

[Operator:]

Our next question comes from the line of Brian Peterson with Raymond James.

[Brian Peterson:]

Congrats on the strong quarter. So I wanted to hit a little bit on some of the integration efforts you mentioned. Obviously, we're seeing a lot of efficiency measures. Is there anything in terms of the go-to-market and the capability and kind of understanding what the breadth of the portfolio can be? Just trying to think about what are some of the sales and marketing efficiencies that are going to be generated by this? Yes?

[Jason Blessing:]

At least on the go-to-market side, Brian, it will be really more on the growth side of things. As I said in my prepared remarks, the business services team inside of Deloitte had a fairly small sales team. And as we announced this deal and started to get feedback from customers and prospects. One, they became interested in business services. And so we thought it was really important to make sure we had the appropriate coverage. I think the other thing that has been a pleasant surprise that's emerged as well as we've had customers talk to us about innovating around business services and potentially developing services that weren't a part of the Deloitte portfolio. So that's also, I think, been 1 of the reasons why we've accelerated the integration and are putting our product and go-to-market teams together. I think it's just going to give us a much more comprehensive view of the market and how we serve it.

[Brian Peterson:]

Understood. Jason and I know you made it in your prepared commentary, you talked about maybe High Tech coming back. Anything you could kind of expand on there or what you're seeing in the pipeline that gives you the confidence in that?

[Jason Blessing:]

Yes. We're certainly starting to see green shoots in High Tech, and there's a number of different things that I would cite that are giving us a bit more confidence there. We have record attendance at our rainmaker account. Both customers and prospects. And particularly the prospect side of things was very encouraging. As we just look at our target accounts and who we're trying to engage with on the High Tech side that number has been trending up. RFP activity has been healthy. And then the pipeline, as I talked about on past calls, has certainly solidified. And then it was good to see the team execute well in the quarter, signed a new logo with Targus and then prosecute several other cross-sell and upsell deals within the base.

[Operator:]

Our next question comes from the line of Nick Mattiacci with Craig-Hallum.

[Nicholas Mattiacci:]

This is Nick Mattiacci on for Chad Bennett. Could you talk about the mix of deals in the quarter that utilized deal ramps relative to, I think, the 50% mix it was in the past few quarters? And then any comment on your outlook for where the use of deal ramps will return to pre pandemic levels? And then also your confidence that these deal ramps will mature as you plan for?

[Jason Blessing:]

Yes. Good question, Nick. So a couple of things that I'll say, deal ramps have fluctuated quarter-to-quarter. Pre-pandemic, we were ramping about 1/3 of our deals in each quarter. And then as we previously reported, it did tick up to 50%, a little bit above 50% at times over the last 4 quarters. I'm pleased that this past quarter was actually back to pre-pandemic levels, particularly for new logos. And so we talked about on the last call that we were expecting as we got on the other side of the pandemic that new logos, in particular, and our need to ramp there would go down. And so we have started to see some of that in this current quarter as well as in some of the deals that are in flight. We do continue to anticipate to use ramps, particularly on SaaS transitions going forward. That's always an important part as we help customers offset some of the transition costs in the near term. But it is good to see ramps mitigating in the new logo space. And then as we've talked about in the past, I mean our gross renewals are very strong. We started ramping deals about 3 years ago. And as some of those early ramp deals have renewed, we've seen them renewing at the full rate, so to speak. So we remain confident there as well.

[Nicholas Mattiacci:]

Awesome. And then just any more commentary you can give us around your revenue expansion within existing customers around deal ramps and cross-sell of additional products? And then finally, how would you characterize how much opportunity still exists just within the current base?

[Jason Blessing:]

Yes. So when we do cross-sells and upsells, there's typically much less of a ramp unless, of course, it's tied to a large SaaS transition. But typically, cross-sells and upsells will have lower amounts of ramps just because we're able to turn those projects -- or excuse me, products on and the projects tend to be quicker. And then in terms of remaining opportunity, we're 18 months into SaaS transitions. We had our first one go live at Gilead. 18 months ago, we've got about a dozen under our belt, roughly a dozen in flight. And now are working through the biggest part of the SaaS transition growth lever over the next couple of years as we address our top 20 customers. And we're really excited about that opportunity because it's not just a growth lever for SaaS transitions, but also stimulates that cross-sell and upsell opportunity, which we quantified in multiple hundreds of millions of dollars. So it's good to start to see those cross-sell upsell patterns attaching to SaaS transitions.

[Operator:]

Our next question comes from the line of Gene Mannheimer with Colliers.

[Eugene Mannheimer:]

Congrats on a good quarter. I wanted to ask another thing or 2 about the Deloitte business. Was that business services contribution that you quoted, $6.5 million all services? Or was there any subscription component to that?

[John Ederer:]

Gene, this is John Ederer speaking. That was total revenue, the $6.5 million. We didn't break it down further than that nor have we provided guidance specifically on that piece of it. And I guess the one thing I would say is that as we have moved to much more rapidly integrate this business, it will get harder and harder to draw those lines of distinction, particularly as we've merged the sales forces and started to cross-sell to existing customers as well. So we did want to provide a little bit of additional insight in terms of the total revenue number, and that's what the $6.5 million is.

[Eugene Mannheimer:]

Okay. Fair enough. And how should we think about the growth rate of that business? Again, I know it may be murky post integration. But given the greater level of sales resources that are being dedicated, how might we think about growth in business services?

[Jason Blessing:]

Yes. Gene, we're not guiding specifically on the growth of business services for 2 reasons. One, the reason that John just cited, whereas we blend the teams together, it's going to get harder to split out. And then I'll tie back to the -- 1 of the prior questions I answered. We're going to continue to see new offerings that develop that weren't included in the Deloitte portfolio of services when they came together. So it's really hard to give a number that will just be a specific growth on top of the $6.5 million that you see reported this quarter. Sure.

[Eugene Mannheimer:]

No, understood. And lastly, did you report the 12-month RPO? Or is that not a number you report every quarter?

[John Ederer:]

Gene, this is John again. Yes. So that number is in the 10-Q, which was also filed today. It was $204 million in total and $108 million for the current portion.

[Operator:]

Our next question comes from the line of Terry Tillman with Truist.

[Unidentified Analyst:]

This is Conor on for Terry. I just actually wanted to talk about the analytics product space and the customers that are consuming them. So I know that the Deloitte business is something that was going to help enable that area in terms of expansion. So just kind of wondering what kind of key trends you're seeing with these products in terms of customer adoption and then where you see these products heading?

[Jason Blessing:]

Yes. It's a great question. So part of the rationale of the Deloitte acquisition was we did get a new analytic product called gross-to-net. And as I've generally answered in some of the past questions, there's a lot of interest in some of these new offerings that came over from business services. So with business services. And then the Intelligence Cloud is a relatively new product for us that has some of the lowest penetration in our customer base. And so being able to provide sophisticated analytics on top of the transactional systems that we've historically been known so well for really represents one of the key growth opportunities as we get through SaaS transitions. You do have to be on our SaaS offering to take advantage of Intelligence Cloud. And so Intelligence Cloud, along with some of the other analytic apps like Validata, I think will continue to be very interesting contribution to future growth.

[Operator:]

Our next question comes from the line of Matt VanVliet with BTIG.

[Matthew VanVliet:]

I guess as you look at how the vaccine rollouts went throughout the year, have you had much in terms of participation in that? And as you look forward into whether it's booster shots or whatever kind of comes about some of this longer-term on a global basis. Have you started looking at either developing a new product or helping companies that are going to potentially be involved in a more global health care network in the future?

[Jason Blessing:]

Yes. Thanks question, Matt. So in terms of participation, I'm happy to report, I'm vaccinated. I've got both Pfizer shots and came through it just fine. So that was an important participation. And then secondly, I mean, from a product perspective, every one of our customers who are participating in therapies and honestly, med tech devices and so forth in support of the pandemic, we have seen increased activity in terms of usage of our products as a result of that. So there has been a slight tailwind there. And then yes. I mean, as we look forward, I do think there is potentially opportunity really just to continue to help accelerate pricing strategies, market access strategies. If there's one thing that we learned in the pandemic, and we certainly saw this in our state of revenue report as well, the rules we've operated underneath in the past have completely changed. And time to market, pricing strategies are going to have to continue to be rethought in the future, and we continue to benefit from that since we're the commercial system record for a lot of these decisions.

[Matthew VanVliet:]

Got it. And then as you look at some of the opportunities that were brought to you with the Deloitte transaction and the pre-revenue market. Can you just help us think about kind of how that pipeline is progressing? I'm sorry if you touched on it a little bit earlier, but just sort of what that market is looking like, especially as more of those companies seem to be looking at partnerships with the larger pharmas at times?

[Jason Blessing:]

Yes. As we talked about, when we announced this deal, that's a significant part of the market that we -- we're generally not accessing or consistently accessing and it significantly boosted our TAM. And I would say 3 plus quarters into this, now we continue to see a lot of those pre-revenue companies that see a commercial approval on the horizon, multiple commercial approvals on the horizon know that they need to modernize and get their revenue management infrastructure in place. And that activity in the pre-commercial market just continues to pick up if you just look at the number of authorizations that are in process. So that's part why we're excited about Business Services because it gives us an opportunity to access that part of the market, but also be able to sell how a customer wants to buy revenue management. Pre-revenue up to some of the largest companies in the world do want business services, and this acquisition now allows us to sell that way.

[Operator:]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Jason Blessing for closing remarks.

[Jason Blessing:]

Thank you, operator, and thank you, everyone, for attending today's call. We certainly look forward to talking to all of you throughout the quarter, and have a nice evening. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.