Feb 9, 2015
Executives
Greg Kleiner - Investor Relations Zack Rinat - Chairman and Chief Executive Officer Mark Tisdel - Chief Financial Officer and Senior Vice President
Analysts
Nandan Amladi - Deutsche Bank Matt VanVliet - Stifel Darren Jue - JPMorgan Chase & Co. Terry Tillman - Raymond James Scott Berg - Northland Capital Markets
Operator
Greetings and welcome to the Model N First Quarter Fiscal 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.
I’d now like to introduce your host for today’s call, Mr. Greg Kleiner, Investor Relations for Model N.
Thank you, Mr. Kleiner, you may you may begin.
Greg Kleiner
Thank you, good afternoon and welcome to Model N’s first quarter fiscal year 2015 earnings conference call. Joining me today are Zack Rinat, Model N’s Founder, Chairman and CEO; and Mark Tisdel, Model N’s SVP and Chief Financial Officer.
Following their prepared remarks we will take your questions. A 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 today’s call is to provide you with information regarding our first quarter fiscal year 2015 performance in addition to our financial outlook for our second quarter and full-year fiscal 2015. Commentary made in this call may include forward-looking statements.
These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission including our Annual Report on Form 10-K and our quarterly reports on 10-Q for information on risks and uncertainties.
Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward looking statements. In addition, during today’s call we will discuss non-GAAP financial measures.
These non-GAAP financial measures which are used as measures of Model N’s performance should be considered in addition to, not as a substitute for, or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our press release.
At times in response with your question, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics.
I encourage you to visit our investor relations website at investor.modeln.com to access our first quarter fiscal year 2015 press release, periodic SEC reports, and the webcast replay of this call. Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2014.
With that, let me turn the call over to Zack.
Zack Rinat
Good afternoon, everyone, and thank you for joining us today. I’m pleased to report that we began the year with solid Q1 results, exceeding our guidance on both the top and bottom line.
Importantly, the business returned to both quarter-to-quarter and year-to-year growth. Before commenting on Q1, I wanted to give you an update on our strategic progress.
Last week, we held our annual customer event, Rainmaker in San Francisco, focused around the theme of Revenue Champions. Rainmaker brought 300 plus attendees, including thought leaders on the largest and most innovative companies in the pharmaceutical and technology industries.
We made two important announcements during the conference and I wanted to spend some time to review them, because they are indicators of strong execution on our strategy. First, we announced the transformation in the way we engage with our customers, which we branded as Rainmaker X-up [ph].
Rainmaker X-up is all about programmatic approach to connecting and communicating with our customers in an effort to crystallize our strategy. Rainmaker X is our executive sponsor group.
Rainmaker U is our collective global user groups, and Rainmaker P is our product group. This announcement met with resounding support from our customers.
And last week, we had the first meeting for all three groups with the total participation of 120 people. We also announced immediate availability of Revvy Sales, the first CRM solution for the semiconductor and component industry on salesforce.com AppExchange.
In April 2014, we committed to release the product in calendar Q4 2014, and we delivered, releasing the product in our winter release this past December. Revvy Sales was built by working closely with a group of semiconductor Lighthouse customers.
Revvy Sales combine the best of both world, Salesforce.com’s Sales Cloud and Model N’s deep vertical expertise, to deliver a vertically focused solution for CRM in one that is fully integrated with our Revenue Management Cloud. We also revealed our new cloud paradigm for bringing all of our products to the market and the immediate availability of Revenue Management Cloud winter 2014 for life sciences.
Revenue Management Cloud is the new name for our entire suite of product, but it’s much more than just a name change. It signals true and massive transformation in the way we develop and deliver product, as well the way our customers consume these products, following the very successful model of our Revvy application.
We released Revenue Management Cloud in winter 2014, and will follow with releases in spring 2015, summer 2015 and winter 2015. And from now on customers who’d expect every Model N product to be released on the same paradigm and the same timeframe.
Finally, we announced Revenue Management as a Service. Revenue Management as a Service is a strategy and a solution to move our installed base from current deployments to Software as a Service.
The announcement we made along with the immediate availability of all the products are indicators of strong execution on our strategy. Now, let’s just get to discuss Q1.
We saw additional success across our new and existing customers in the first quarter. We were very excited to add top three pharmaceutical companies to Model N family through their purchase of our Revvy Global Price Management solution.
This streamlined and coordinated processes enabled by our Revvy GPM solution will allow them to make timely and relevant pricing decisions to support billions of dollars in revenue. Combined with our robust analytics and reporting capabilities this implementation will provide significant financial benefit in this increasingly viable function.
This win is a tremendous validation not only of our solution, but of the growing acceptance of Software as a Service in large pharmaceutical companies. With Actavis, we signed a deal to expand the current Model N environment.
Actavis is using Model N revenue management application suite as a platform to consolidate the revenue management function from their acquisitions. In addition, we will be helping Actavis manage their simulation of both current and historical data of its acquired companies which will enable them to report in accurate, complete and timely fashion.
Actavis, a long standing Model N customer selected Model N new Revenue Management as a Service offering. Actavis will expand the solution with new application, make way to Revenue Management Cloud constant release and will stay current with future releases using revenue management in the service.
In the midmarket, we expanded our relationship with LEO Pharma, an existing customer of Revvy Global Price Management in Europe. LEO selected Model N for its full suite of revenue management solution in the U.S.
They will be using Revenue Management as a Service, an Express implementation methodology which delivers out-of-the-box commercial and regulatory functionality. LEO is migrating to automate revenue management functionality with Model N, leveraging the proven industry processes embedded in our product to enable growth, regulatory compliance and process efficiency.
In addition, we continue our history of helping to lead discussion of the most vital issues facing companies in our target industries today, as well as best practices in how to deal with these challenges. We recently sponsored and presented CBI’s Gross-to-Net Accounting and Accruals conference in Philadelphia, and the second Annual Medical Device Contracting and Strategic Accounts Conference in Dallas.
More recently we participated in the EPP Life Sciences Executive Briefing in Zurich to address industry pricing concern. Overall, we continue to execute on our strategic initiative.
Our customers consider Revenue Management Cloud is mission critical application. We have significant opportunity in a large market to help customers transform the revenue management processes.
Let me now turn the call over to Mark to discuss our financial results and guidance in more detail.
Mark Tisdel
Thank you, Zack. Total revenues for the first quarter were $22.1 million, above our guidance range of $21.6 million to $21.9 million.
This compares to $21.6 million in total revenue in the year-ago period. A return to both quarter-to-quarter and year-over-year growth is evidenced as the improvement in our execution have taken hold, and as I’ll outline in a moment, we expect the velocity of our growth to improve as we move throughout the year.
Within total revenue, license and implementation revenues were $9.7 million, and SaaS and maintenance revenues were $12.4 million for the quarter. Before I move on to profit and loss items, I want to remind you that my commentary will be focused on non-GAAP results.
A reconciliation of non-GAAP to GAAP results is provided with our earnings press release issued earlier today. Gross profit for the fourth quarter was $13 million compared to $12.2 million in the first quarter of fiscal 2013.
Similar to recent quarters, gross profit in this quarter included an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch of our Revvy CPQ offering. Overall, gross margin in the quarter was 59%, compared to 57% in Q4 of last year.
As we’ve discussed in previous calls, we continue to focus on gross margin improvement and we expect our overall gross margin to show further improvement year-over-year as we migrate to a higher percentage of revenues with SaaS and maintenance revenues. We do expect some quarter-to-quarter variability in gross margin depending on the mix of revenue and other factors.
Research and development expense were $4.1 million compared to $4.6 million in the fourth quarter of fiscal 2014. We are continuing to invest in our new products.
The Q1 results did include the capitalization of expenditures related to Revvy sales in the order of $600,000. Sales and marketing expense was $6.1 million compared to $4.7 million in the year-ago period.
This increase was driven by our continued investment in sales and marketing personnel and marketing program spend. G&A expense was $4.5 million compared to $3.6 million in Q1 of fiscal 2014.
Operating loss for the period was $1.7 million compared to a loss of $0.7 million in Q1 of last year and above our guidance of an operating loss of $2.5 million to $2.8 million. Net loss in the first quarter was $1.7 million compared to a net loss of $0.8 million in the first quarter of fiscal 2014, this produces a net loss per share of $0.07 based on the share count of 25.3 million shares compared to a net loss per share of $0.03, based on the share count of 23.5 million shares in the first quarter of last year.
This is above our guidance of $0.10 to $0.11 per share loss. Adjusted EBITDA for the first quarter was negative $0.8 million, compared to a positive $0.2 million in the year-ago period.
We ended the first quarter with $96 million of cash and cash equivalents, down slightly from $101 million at the end of fourth quarter. At the end of the first quarter our accounts receivable balance was $16.7 million and our total deferred revenue was $26.3 million.
As previously noted, we believe our accounts receivable and deferred revenue balances are not meaningful indicators of the business activity during any particular quarter, as the timing of the invoices in our contracts impact these items, because we do not bill our customers up front for the total contract fees. For the first quarter, cash flow used by operations was $3.5 million, which after adding CapEx of $700,000 and $600,000 of capitalized software produces a negative free cash flow of $4.7 million.
This compares to cash used by operations of $1.8 million in the first quarter of last year, which after adding $100,000 of CapEx, produce a negative free cash flow of $1.9 million. Similar to prior commentary in regards to our receivables and deferred revenue balances, there can be some quarter-to-quarter variability in our cash flow as it is impacted by the timing of invoices under our contracts.
Moving on, let me now outline our guidance for the second quarter of fiscal 2015, as well as expectations for the full fiscal 2015. For the second quarter ending March 31, we expect total revenues to range from $22.3 million to $22.6 million, non-GAAP loss from operations in the range of $2.6 million to $2.9 million.
This will lead to a non-GAAP net loss per share in the range of $0.10 to $0.11 based on a weighted average share count of 25.8 million. For the full fiscal 2015, we expect total revenues to range from $92 million to $93.5 million or a growth of 13% to 14% for the year as a whole and unchanged from our prior guidance.
Non-GAAP operating loss from operations in the range of $7.5 million to $9 million, an improvement compared to our prior guidance of $8 million to $9.5 million. Non-GAAP net loss per share in the range of $0.29 to $0.35 based on a weighted average share count of 25.9 million shares, an improvement compared to our prior guidance of $0.31 to $0.37.
In addition to the formal guidance, I did want to reiterate that we remain committed to reaching break-even on an adjusted EBITDA basis by the fourth quarter of this year. In addition, though the timing of certain contracts impact the revenue mix in Q1, we continue to expect the mix of recurring revenues in fiscal 2015 will improve over fiscal 2014 level.
In summary, we are pleased in the direction of the business. Our growth initiatives have positioned us well for a year of increasing growth, operating leverage, and revenue mix improvement.
The revenue management market remains large and untapped, and we believe we are well-positioned to execute in this tremendous opportunity, and success of our recent Rainmaker event with both existing customers and prospects reinforces this point. We will now open the floor for your questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
[Operator Instructions] Our first question comes from the line of Nandan Amladi from Deutsche Bank. Please proceed with your question.
Nandan Amladi
Hi, good afternoon. Thanks for taking my question.
So, Zack, clearly a big event last week at the conference, and a lot of new positioning from a cloud and subscription-based business model. How much is your sales promotion and sales process changing now to position one model or another, and how are you changing your sales incentives perhaps to push one versus the other?
Zack Rinat
Sure. Nandan, as you know our transition to the cloud has been occurring for quite some time.
We had a set of products that we brought to the market under the Revvy brand. This includes Revvy CPQ and Revvy Global Price Management, as well as the new release of product of Revvy Sales.
In addition, we also did some work in terms of selling increasingly a SaaS type of solutions for kind of our customers and when you look at the progress that we have made including some of the large deals that had with Intel or with Fairchild, they all basically consume as SaaS. I believe that we have a very strong incentive program for the sales organization to go and to push out more recurring revenue.
We are cognizant and also supportive of the fact that we need to support our customers with choices. And basically the Salesforce is more incentive from a commission point of view to sell recurring revenue solution.
Nandan Amladi
Thank you. And a quick follow-up if I might.
As the system integrated community continues to grow, will there be a point when you might be able to recognize your license revenues separately from implementation?
Mark Tisdel
This is - Nandan, it is Mark. So in the situation where we would have partners who did the implementation from end-to-end, if it was sold as perpetual license, you have to recognize it as delivered.
As you know we are - we have strong relationships with our partners and we continue to expand that relationship as we move forward. We have not factored in any one-time perpetual license in this new revenue model.
Nandan Amladi
All right, thank you.
Zack Rinat
Additionally from - kind of from direction point of view, as we indicated in the past, we want to focus on line two. We like to go line two and we think this where the opportunity for the company exists.
When you look at the announcement that we made this past week that we’re basically in end of the process, not just the beginning of the process, because we also announced immediate availability of the - kind of the product. And the way that we think about it is that, the more that we have recurring revenues it’s better for the customers and it’s also better for Model N in the long-term.
Mark Tisdel
As I mentioned, Nandan, the situation where we have a one-time license pick-up from a revenue perspective where the SI [ph] does the implementation and its perpetual license is an unlikely scenario for us.
Nandan Amladi
Okay. Great.
Thank you.
Operator
Our next question comes from the line of Tom Roderick from Stifel. Please proceed with your question.
Matt VanVliet
Yes, hi, guys. Matt VanVliet on for Tom today.
Thanks for taking my question. First off, as you move to have more and more products delivered on a subscription as a service basis, what are the near-term impacts to the model and how do you look at that trade-off from a long-term value perspective?
Zack Rinat
Yes, so when we look at the kind of the short-term, the medium-term, and the long-term, we fundamentally believe that it’s a good strategic move for the company, on a couple of levels, but I would say it’s also something that is going to support our growth. What we in particular, I just want to relate to the announcement about Revenue Management as a Service, which is really a strategy to take customers from current deployment into SaaS.
And when we think about this from a customer point of view, it’s about really moving them to this notion of no-hassle upgrade to reduce the total cost of ownership. But it also means that we have an opportunity as a company to get more revenues and more recurring revenues from the installed base.
When we look at the customers that we engage already in a model of SaaS and recurring revenues, we found out that among our customers these are also the happiest customers. So I believe that this is really a win-win, on all aspects, driving customer satisfaction, reducing the total cost of ownership for the customers and getting more revenues for the customers.
And from my perspective we see it as an opportunity to grow the business.
Mark Tisdel
Hey, Matt, this is Mark. Just one additional thing, with the guidance for the fiscal year that we shared on the call, we factored in the market conversion to SaaS and the fact that currently we offer all our products on the SaaS platform today.
Matt VanVliet
Okay. That kind of leads me into my next question.
How much of a shift can we expect in the reported result this year in terms of mix-shift between license to SaaS? And then, I guess, more importantly where does that end up maybe three or five years down the road and what needs to happen to get to that goal.
Mark Tisdel
So from a fiscal year 2015 perspective, we spoke about this on the last call, we expect to see the continued migration to line two from line one. We do expect both line one and line two to grow year-over-year fiscal year 2015, but we expect to see line two growing faster than line one.
And we did talk about the fact we expect to see above 60% of our revenue online too and that continue to accelerate as we move ahead. We have not modeled out two to three years out to see what that progress would be, but I would expect to see the line two revenue increase year-over-year, as more and more of our customers adopt the SaaS platform.
Zack Rinat
And one of the things that I made crystal clear during my keynotes speech was that the fact when you look at Revenue Management as a Service, we provide it as an option to our customers. We fundamentally believe this is going to deliver enormous value to our customers.
As I indicated in my remarks we have already Astellas, which is long term customer of Model N, that actually engage with us on Revenue Management as a Service, as well as a couple of other kind of customers, but we as a company we like to provide choices to our customers and I believe that as this is going to become crystal clear about the value of this we are going to see a vast majority of the Model N installed base, if not all move to this model.
Matt VanVliet
Great. Thank you, guys.
Operator
Our next question comes from the line of Sterling Auty from JPMorgan. Please proceed with your question.
Darren Jue
Thanks a lot. It’s Darren Jue on for Sterling.
I’m just wondering if you can talk about the mix of business this year, how that’s shaping up in terms of the life sciences vertical versus hi-tech. And whether you can maybe update us on whether there are other verticals that you tend to go after in the near-term.
Zack Rinat
Sure, so we do not disclose the couple of the differences between life sciences and kind of in the hi-tech or quarter-by-quarter kind of basis. I think also that the fact that we ended kind of Q1 there’s going to be some seasonality in both of verticals.
And in particular, you have to remember that we just released Revvy Sales at the end of December. So this is basically we are going into this quarter first time actually selling this kind of this product.
In general, the only comment that I will make is that we expect the hi-tech business to grow faster than life sciences. It’s a very untapped market.
We believe that Revvy Sales, because of the partnership that we have with Salesforce.com, because of the fact that that’s the only CRM solution that is targeted in the semiconductors and the component manufacturing industry, is going to have a good success as we move forward. So it’s the only comment that I want to make about the differences between the two kind of the two verticals.
Darren Jue
Okay. I mean, that’s helpful, thanks.
Maybe a question for Mark, sales and marketing came in a bit lower than we were modeling. I’m just wondering if there were any lower than expected marketing program cost in the quarter or where there perhaps lower personnel costs.
Mark Tisdel
Now, you have to remember Darren in our model, in our fiscal year that Q1 for us is Q4 calendar year and then Q2 for us is obviously Q1. So therefore, we reset all of our commission from a seller-rated perspective with our sales folks in our Q1.
So basically everyone starts back at the bottom again. So we would expect to see lower commissions in our Q1, which will be fiscal Q4, and it would continue to move up as we move through the year.
From a marketing program spend perspective, we are very consistent throughout the year although from a calendar perspective Q4 with the holiday season, we do have a few less programs that we invest in and we’ll continue to see that pick-up as we move into the fiscal year.
Darren Jue
Okay. Thank you.
Operator
Our next question comes from the line of Terry Tillman from Raymond James. Please proceed with your question.
Terry Tillman
Hey, good afternoon, gentlemen. Hopefully you can hear me, okay.
Zack, I guess you are telling the idea of success with the top three pharma companies. And I think it was in a SaaS model where you’re having the traction.
Could you all talk a little bit more about the financial impact and the timing on how this would roll into income statement from a revenue standpoint? And could this potentially be up 10% plus customer?
Zack Rinat
Sure. So a couple of things about it, first of all, we were very pleased with this win.
It’s one of the top three largest pharmaceutical customer company. As you can imagine it was a competitive opportunity and we were very excited to kind of win it.
But furthermore, I think it really pushes kind of the point, that there is growing acceptance of SaaS as a delivery model in the pharmaceutical industry. We have right now already seven of the top fifteen pharmaceutical companies on our Global Price Management solution.
And when you think about it, this is really a solution that is managing every price that they have across the globe on the multi-tenant SaaS platform based on force.com [ph], something that two years ago was kind of unthinkable. We are in - kind of now in the midst of the implementation right now, even as we signed the deal just in December, it’s very tight implementation.
And another statistics that kind of I want to give to you is that when you look at implementation on somewhere between 100 to 200 countries, it actually last less than six months. So that’s another big benefit of this methodology and solution that kind of that we have.
So with this, I will turn this to Mark to speak about how it flows to the - kind of to the P&L.
Mark Tisdel
So, Terry, so couple of things as Zack mentioned on the call earlier this is on the SaaS platform, so obviously we will be recognizing the subscription fees ratably over the term of the engagement and then service would be recognized as delivered. As far as when the revenue would be, again, it begins immediately.
We’ve already begun the work on the projects so we began recognizing both the subscription and services fee to revenue associated with this project. Then your other question was growing to 10%, so I think we have the ability with this particular customer to grow with other products and services.
And they certainly can be very large customers as they move ahead.
Terry Tillman
Okay, okay. I guess, another question, Zack, is - and I don’t know if some of this - well first question is, as it relates to December quarter, it’s hard for us to really get a - you mentioned a variety of customer wins, but it’s hard for us to really gauge what that means in terms of affecting the revenue model.
Overall bookings activity, do you feel like it’s strengthening? Is it about the same in terms of close rates and demand trends or softer, any kind of directional commentary?
I know you’re going to give us booking numbers, but just - it’s helpful to just get a sense on how the overall bookings activity is versus maybe previous quarters?
Zack Rinat
Well, as you mentioned, I mean, we do not kind of disclose, kind of bookings. I think from kind of from a market kind of point of view, I would say that the market is about kind of the same as we headed kind of in the past.
We are making good progress on our - kind of our goal. And obviously with the new Revvy Sales for components and semiconductors, because of the fact that that we are outside kind of normal revenue management space, I think this is market that is very hot.
It’s going kind of very strong. But we have a way of deal we’re going to establish ourselves as a credible vendor there, obviously, that the partnership with Salesforce.com held.
So this is where we need to - where we are putting some effort in terms of accelerating the goal.
Terry Tillman
Okay. Just…
Mark Tisdel
From a [indiscernible] side of that, as we mentioned earlier, guidance for the year is $92 million to $93.5 million, which is 13% to 14% year-over-year increase. And we mentioned on the last call, and on this call, we expect to exit the U.S.
historic growth rate.
Terry Tillman
Got it. And just my final question, just relates to - just for education purposes, in terms of Rainmaker, do you typically use that as an event actually to close business into a quarter or is it something it just kind of helped?
I mean obviously there is the learning, and training, and education component, but is it something that kind of strengthens more the pipeline for the rest of the year, or - just trying to understand whether that’s actually an event. You actually close a lot of business at or I shouldn’t think of it that way?
Thanks a lot.
Zack Rinat
Yes. I will look at kind of Rainmaker the way to - for us to get aligned with the customers on a strategic basis.
It’s a way for us to bring a prospect which really help us in sales processes because they can actually get locked down in a very - kind of in a very short period of time. And it is, I would say, in general, a minor impact on closing deals, it’s just timing effect, but it’s minor.
Terry Tillman
Okay, thanks.
Operator
Our next question comes from the line of Scott Berg from Northland Capital Markets. Please proceed with your question.
Scott Berg
Hi, Zack and Mark, congrats on a good quarter. Couple of quick ones here.
First of all, Zack, can you talk a little bit more about Rainmaker in terms of the momentum that you typically gain off of this event and this was up a lot on year-over-year basis and up just closing deals. Were there any product areas in particular that that you thought really good about in terms of the momentum that we are seeing during the show in the conference?
Zack Rinat
So I felt very good about this event. I thought this was actually one of the best event that we ever had in the history of the company.
I tend to relate more to customers than prospect feedback, because as you know, we have some long-term relationship there. And I would say that throughout this event starting with Rainmaker X, which is our Executive Strategy Board to the closing session with Salesforce.com, I felt it was very good kind of momentum and they received a very strong feedback from our customers and prospect.
We are going to conduct also an official survey and then we are going to get the real results. But on that level, it felt actually as an extremely strong event for the company.
Scott Berg
Okay, great. And then from the revenue management as a service kind of roadmap to convert existing customers that are perpetual license to the cloud products.
Can you give any color on what pipelines for some of the larger life sciences or pharma customers look like in terms of them potentially moving, just try to better understand is this is a slow and steady over a five to six, seven-year type progress or should - could we see some additional momentum maybe earlier than that?
Zack Rinat
Yes. So, again, when you look at the way that we formed the way that we evaluate in the way that we decide on strategy, we do it in - with very close interaction with our customers.
We developed the strategy of revenue management as a service for quite some time and now actually we announced it and it’s ready to be consumed by the customers. Just because of the fact that it is targeted at our installed base, I would say, we have a quite significant discussions with all of our customers on the subject.
And from my perspective, the question is not if the question is when - if the issue is more of an issue of when. And as a company, I think that we should have the flexibility with our customers, because we need to make sure that people are moving in this direction in their own pace and all level of comfort.
And I would say that so far initial indicators are very strong about people’s level of comfort, and we will continue to give you an indication as we gave in this call about - tell us about companies that are moving in this direction.
Scott Berg
Thank you. And the last one for me, Mark, is, you talked about your reiteration of exiting this year in Q4 with roughly break-even adjusted EBITDA or better.
Can you talk a little bit more about - is that more a function of gross margin improvements then further improvements on the OpEx line or kind of [indiscernible] of both?
Mark Tisdel
So, Scott, I mean, it’s really a function of all three lines we talked about the revenue growth year-over-year and the expectations there. We’ve talked about gross margin.
We do expect gross margin to continue to improve and you’ve seen above the last two quarters have improved over the [indiscernible] run rate, and we expect to be able to improve on that as we move into the back-half of the year. And then from an operating expense perspective, we are going to leverage our current investments in the company.
We did make some investments in sales, marketing and development upfront, feel great about those investments and the return we are getting on those and we will continue to invest in those areas and we will be able to leverage that as we move into 2016.
Scott Berg
All right. That’s all I have.
Thanks for taking my questions.
Operator
There are no further questions in queue. I would like to hand the call back over to Zack Rinat for closing comments.
Zack Rinat
Thank you, everyone, for joining the call of Q1. We appreciate you taking the time.
As I indicated, we are making good progress on our strategy and we are looking forward to speaking with you in the future.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.