May 11, 2015
Executives
Greg Kleiner - IR Zack Rinat - Founder, Chairman and CEO Mark Tisdel - SVP and CFO
Analysts
Sterling Auty - JPMorgan Nandan Amladi - Deutsche Bank Tom Roderick - Stifel Terry Tillman - Raymond James
Operator
Greetings and welcome to the Model N Second Quarter Fiscal 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host, Greg Kleiner, Investor Relations at Model N. Thank you, you may begin.
Greg Kleiner
Thank you, good afternoon and welcome to Model N’s second 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 Web site where this call is being simultaneously webcast.
The primary purpose of today’s call is to provide you with information regarding our second quarter fiscal year 2015 performance in addition to our financial outlook for our third quarter and full-year fiscal 2015. Commentary made on 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 Web site at investor.modeln.com to access our second quarter fiscal year 2015 press release, periodic SEC reports, and the webcast replay of this call. Finally, unless otherwise stated, all financial comparisons to 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 had solid Q2 results, exceeding our guidance on both the top and bottom line.
Importantly, the Q2 was the second quarter in a row where the business produced both quarter-over-quarter and year-over-year growth. In our last call, we outlined the strategic direction of the company designed to drive both topline growth and accelerated transition of our business model to recurring revenues.
I am excited to share with you strong positive indicators of our progress on both fronts. First we launched revenue management cloud spring '15 is part of our new cadence of product releases.
Revenue Management Cloud is a true and massive transformation in the way we develop and deliver products as well as the way our customers consume these products. We were delighted that in second quarter two of our largest customers Merck and J&J selected to upgrade their the existence implementation to revenue management cloud.
Furthermore Merck has signed on for revenue management as a service which is a strategy and a solution to move our installed base from the current deployments to SaaS. Merck plans to expand the solution, migrate to revenue management cloud spring release, and will stay coherent with future releases using revenue management as a service.
We are engaged in discussion about revenue management as a service with an increasing number of our customers and prospects. We are also excited to add a top five pharmaceutical company based in Europe to the Model N family through their purchase of our Revvy Global Price Management solution or Revvy GPM.
In addition, AstraZeneca another top 10 European based pharmaceutical company expanded their implementation of Revvy GPM in the quarter. Revvy GPM is a multi-tenant SaaS solution based on the [Suffolk] One platform that enables pharmaceutical companies to manage their prices policies on a global basis.
We believe that Revvy GPM is quickly becoming the de facto industry standard with 9 of the top 25 pharmaceutical companies already as customers. Last but not least for life sciences, we signed a significant deal with one of our largest customers, another top 15 pharmaceutical company to expand their implementation of revenue management.
This deal encompasses several of our product including our managed care solution providing an end-to-end management of the entire managed care revenue management process in our skip validate solution. These lend and expand deal demonstrate the tremendous opportunity that Model N has to expand within our customer base.
On the hitech side we signed a large SaaS deal with Freescale Semiconductors, a semiconductor leader with more than 4 billion in revenue. Freescale purchased our end to end revenue management cloud fleet as they were looking for a platform replacement to address their pricing and channel management needs.
The Model N revenue management cloud suite will provide swift care transparency into revenues and pricing across the organization a longer insight into customer intelligence, volume compliance and "to maximize the revenues and increase sales effectiveness". Q2 was also the first quarter in which we sold the Revvy sales application suite, or Revvy Sales.
Revvy Sales combined the best of both worlds, Salesforce, Sales Cloud and Model N's deep veridical expertise to deliver ad-vertically focus solution for CRM and one that is fully integrated with our revenue management cloud. We were excited to quickly sign two customers in the quarter, adding [indiscernible] a global leader in micro controller security and tax solutions and Microchip a leading provider of micro controller and analog semiconductors.
[Effect] that's two living semiconductors company purchased ready sales within the first quarter of launch is the clear testament to the value of vertical CRM built when and for the semiconductor industry. And either winning the hitech this quarter was [Indiscernible] who purchased our channel management cloud product.
[Indiscernible] was looking for a solution to manage their global indirect revenues to driver better pricing and reduced margin erosion across the global channel. Our proven success with channel partners and our revenue management cloud vision helped in forming these new relationship.
In summary I'm excited about our strategy and the early successes and acceptance we are seeing in the market. Modern N is growing while increasing the mix of recurring revenues at the same time.
Finally as Mark will outline in a moment we are expecting both of our growth and revenue mix to show further improvements over the balance of the year. 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 second quarter were $22.7 million, above our guidance range of $22.3 million to $22.6 million and growth of 10% compared to 20.7 million in the year ago period.
As both the pace of our business and execution continues to improve this is translating into an improving growth profile and increased percentage of revenue coming from SaaS and maintenance line as I will outlined in my guidance shortly. Within total revenue, license and implementation revenues were $9.7 million, and SaaS and maintenance revenues were $13 million for the quarter.
The mix of revenues in Q2 was 57% SaaS and maintenance versus 43% license and implementation and improvement on 52% SaaS and maintenance versus 48% license and implementation in Q2 of fiscal of 2014. 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 second quarter was $13.5 million compared to $11.5 million in the second quarter of fiscal 2014.
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 product. Overall, gross margin in the quarter was 60%, compared to 56% in Q1 of last year and the best quarterly performance in nearly four years.
We have been pleased with the continued improvement in gross margin, while we continue to increase our percentage of SaaS and maintenance revenues. We do expect some quarter-to-quarter variability for the remainder of fiscal 2015 and gross margin heading under mix of revenues and other factors.
Research and development expense was 4 million compared to 4.3 million in Q2 of fiscal 2014. We're investing to further expand the breadth and depth of our products, but the result of this quarter did include the capitalization of expenditures related to Revvy sales our serum offering in the order of $700,000.
Sales and marketing expense were 7.1 million compared to 5.6 million in the year-ago period. This increase was driven by our continued investment in sales and marketing as we look at expand our sales coverage and continue to increase our sales pipeline.
G&A expense was 4.1 million compared to 3.5 million in Q2 of fiscal 2014. Operating loss for the period was 1.7 million compared to a loss of 1.9 million in second quarter of last year and above our guidance of an operating loss of 2.6 million to 2.9 million.
Net loss in the second quarter was 1.7 million compared to a net loss of 1.9 million in the second quarter of fiscal 2014. This produced a net loss per share of $0.08 based on the share count of 25.9 million shares similar to the net loss in Q2 of last year which was based on a share count of 24.4 million shares.
This was above our guidance of a net loss of $0.10 to $0.11 per share. Adjusted EBITDA for the second quarter was negative 0.8 million, compared to negative 1.1 million in the year-ago period.
We ended the second quarter with 93.2 million of cash and cash equivalents, down slightly from 96.4 million at the end of first quarter. The cash utilized in the second quarter was largely due to the timing of cash collections related to a pair of transaction.
We expect to end fiscal 2015 with approximately 93 million to 94 million in cash on the balance sheet. At the end of the second quarter, our accounts receivable balance was 18 million and our total deferred revenue was 23.9 million.
As previously mentioned, we believe our accounts receivable and deferred revenue balances are not a meaningful indicator of the business activity during any particular quarter, as the timing of the invoices under our contracts impact these items because we do not bill our customers up front for the total contract fees. For the second quarter, cash flow used by operations was 3.8 million, which after adding CapEx of 300,000 and 700,000 of capitalized software produces a negative free cash flow of 4.8 million.
This compares to cash used by operations of 4 million in the second quarter of last year, which adding 400,000 of CapEx, produces a negative free cash flow of 4.4 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 invoicing under our contracts.
Moving on, let me now outline our guidance for the third quarter of fiscal 2015, as well as our expectations for the full fiscal year 2015. For the third quarter ending June 30th, we expect total revenues to range from 23.1 million to 23.4 million, non-GAAP loss from operations in the range of 2.3 million to 2.5 million.
This will lead to a non-GAAP net loss per share in the range of $0.09 to $0.10 based on a weighted average share count of 26.2 million shares. For the full fiscal 2015, we expect total revenues to range from 92.5 million to 93.5 million or a growth of 13% to 14% for the year as a whole.
We have increased the bottom end of the range from the prior guidance by 500,000. Non-GAAP loss from operations in the range of 7.5 million to 8.5 million, an increase in the bottom end of the range of 500,000 from the previous quarter, non-GAAP net loss per share in the range of $0.29 to $0.32 based on a weighted average share count of 25.9 million shares, this is a $0.03 improvement at the bottom end of the range compared to prior guidance.
In addition based on the new business book in Q2 in the pipeline that continues to ship to recurring deals, we are increasingly confident that the mix of SaaS and maintenance revenue will be 60% for the full fiscal year 2015 which implies a much higher rate exiting this year. A majority of the bookings this year have been recurring in nature as the market acceptance of our offerings continues to improve.
Overall the business continues to show improvement in both growth and predictability. We expect to show further progress in both aspects over the balance of the year.
We believe our leadership in the large and growing market positions us for further success going forward. I will now turn the call back to Zack.
Zack Rinat
Finally I would like also to share with you that we're welcoming a new board member to the Model N Board of Directors, Alan Henricks is a 40 year veteran of the high-tech industry where he served as a CFO of public and private companies such as Pure Digital Technologies, Traiana, Interwoven, Informix, Documentum and Borland. His extensive broad experience serving on the Board of Directors of local [at live productive technologies] NME and AT&T networks they are very excited to having to join our board.
And with this I would this to the operator to take your questions.
Operator
Thank you. [Operator Instructions] Thank you.
Our first question comes from the line of Sterling Auty with JPMorgan. Please proceed.
Sterling Auty
Yes, Thanks. Hello, guys.
I appreciate the comments about cash flow on deferred revenue not being a good indicator I hear the positive commentary and some of the key studies but any additional color you can give us in terms of the bookings momentum in the quarter you know especially in the life sciences area and what we might think about in terms of where the revenue growth might be heading in the coming quarters.
Zack Rinat
Hey Sterling thank you and thanks for the question. We seriously progress across our product lines, across the verticals and also across geographies.
We see our growth in the life sciences and we see the growth coming both in terms of the size of the business as well as the size of the recurring revenues as the new offering that we brought to the marketplace and the new product that are customer catching up. And as you heard in the press release we also added a top five pharmaceutical companies based in Europe and they AstraZeneca was another one that extended their implementation of Revvy global price management, so it can also give you a good indication that we are doing well actually across geographies.
We see actually also a good growth in high-tech and both the core products that we hear and we are very excited about the fact that within the first quarter of going to market we were able to assign two of our customers to Revvy kind of [Indiscernible] sales. So across the board we see good progress there with the business and all that part of the business are growing.
Sterling Auty
And then any color you can give us in terms of continued improvement you are seeing in terms of salesforce productivity will be great as well?
Zack Rinat
Right. So, as related to salesforce productivity we are still increasing the size of the sales organization we had a very productive at previous year for their triple debt have been in the sales organization throughout the year and as we progress in the year we [indiscernible] this very kind of very carefully and both in terms of the size and in terms of effectiveness we have been right now been able to recruit at pretty nicely into a kind of not to the organization we do not depend on the new sales organization getting to productivity this year in order to meet our numbers but this is basically where we make the investment for the next year.
Operator
Thank you. Our next question comes from the line of Nandan Amladi with Deutsche Bank.
Please proceed.
Nandan Amladi
Hi guys and thanks for taking my question. So, Zack as clearly your bookings makes a shifting more to those subscription model how have you adapted your sales compensation and incentive structure.
Zack Rinat
And although season incentive through incentive through a sale recurring revenues and plus as a company it was always about focusing on what is the right thing for the customers and align our sales strategy and sales compensation with the needs of our customers and it's from an incentive point of view and sales organization is clearly incentived to [several] recurring revenues.
Nandan Amladi
Okay and then in terms of your investments for the remainder of the year and perhaps looking ahead into next year how much is that going to be any change I guess and how you fund your R&D staffing versus sales and marketing and within each one perhaps more importantly for sales and marketing which verticals will you focused on the little bit more I know you have a growing tech business but it's still rather could be a small compared to last sciences?
Zack Rinat
As I mentioned in my previous comment we expect both replicas to continue to continue to grow for the business and as related to the hitech we did an excellent job in recruiting and we are right now almost at the capacity that we think that we are going to cash flow we are going to meet and as related to a life sciences we are adding kind of in a more sales capacity for the reminder of the year and for next year.
Operator
Our next question comes from the line of Tom Roderick with Stifel. Please proceed.
Tom Roderick
I wanted a follow up on the Revvy GPM product, you had a couple of nice announcements this quarter another top five firm in Europe, can you just give us a little bit of reminder as through your displacing is anybody at all and those sort of solutions that when you get into this big customers of their not using anything, what is the decision plus is look like in and how long individual cycles typically takes to that product
Zack Rinat
Revvy Global Price Management is the product that enable pharmaceutical companies to manage their prices on a global basis, this is the derived from manufactured traditionally a pharmaceutical companies, they have made the pricing decision in local countries without really relating to the ecosystem to other countries. However over the last decade the companies have started to benchmark the healthcare system of other countries, which really created a wave of related prices where a local decision in Greece as an example can influence that the pricing in Germany and across throughout the world.
[indiscernible] pharmaceutical companies to start thinking about a pricing decision in a global basis and really to understand the dependencies between a local decision and global prices, furthermore it also pushed them to make a decision related to the loan sequencing of [indiscernible] because as we mentioned, it makes a big kind of big difference. And traditionally these companies were using spreadsheets and actually homegrown systems that they developed in early days.
And when you look at the Model N solution we bought a solution that we develop over the last time. Actually four years to the market, we decided to part with the sales force we developed this product on the salesforce.com platform or sale force one and it became to be an extremely successful product as we mentioned nine of the top 25 pharmaceutical companies are already as customers, we announced a top five pharmaceutical company in the previous quarter and we announced another one this quarter.
And we believe that this trend is going to continue. I just wanted to go and iterate the importance of this product on couple of levels.
The first one is that nine of the top 25 top pharmaceutical companies are managing every price that they have across the globe in a multi-tenant SaaS platform, something that normally predict two or three years ago. The second one is the Model N is getting new customers based on this product and the third one is that's create Model N an enormous opportunity to partner with these companies and further expand our solution to right the market.
Tom Roderick
Mark, quick follow up for you, just in terms of the gross margin line, you noted the I think best gross margin, do you have four years both of those segment lines are improving within the contracts, can you give the guidance for the remainder of this year? How should we think about the progression for gross margins and ultimately, where do you think about sort of the mid-term or longer-term targets in that line?
Mark Tisdel
Sure, Tom. As we've noted in the past, we don't guide on gross margin.
I think we're very pleased with our success on both line 1 and line 2, we've had continue focus on that. As we move to the year and we'll continue to focus on as we move forward.
I would expect to see some fluctuations from quarter on quarter and continues to drive that overall improvement in gross margin as we move forward especially in line 2. As we've talked about in the past, we look out into the future because of the mix change, I'd expect gross margins in the future Q, going to be over 60% and continue to move to the right as we move ahead.
Operator
Thank you. Our next question comes from the line of Terry Tillman from Raymond James.
Please proceed.
Terry Tillman
I guess the first question relates to Revvy CPQ and Revvy Sales. I just really have no idea on how to think about deal sizes.
How do they compare to each other, first of all? And then secondly, with these new Revvy Sales wins, are we talking low six figures, mid-six, high six figures, or are they seven-figure deals?
Just any kind of idea on how to think about the size mix in some of those early deals. And again, comparing Revvy Sales deal sizes to Revvy CPQ.
Zack Rinat
Sure, absolutely. I think first of all it's too early to talk about just to remember that we sold only two deals with Revvy sales.
We were very excited about these deals because they happened in a very short period of time. As you know, we released a product just in December, so this was the first quarter that we sold the product and this product has an enormous opportunity in the market because it really makes a huge difference where you have a verticalized CRM that combines best of both world in one that is integrated all the way to revenue management and it's a product and a solution that we have right now that I believe is going to make a big difference for our customers and is going to be very successful for Model N, but I think it's too early to go there.
As related to Revvy CPQ, Revvy CPQ is a product that we target in the beginning at our go to market actually to the small and medium size business and overtime we actually started to get a traction with more medium size and large companies, but it's too early for us to talk about the size of deals and we will share with you as we get more experience in the market.
Terry Tillman
Okay and Zack I guess, last quarter you had successful the largest pharma company globally and this quarter you've talked about the fifth largest pharma company. I guess could we get an update on the deal from last quarter where you're in that implementation and also SaaS deal, how do we think about the timing of that stating to hit the P&L and maybe in comparison than when we could start expecting this new big deal to hit the P&L?
A - Zack Rinat
Oaky so let me talk about it from an operational point of view and I turn to this Mark to speak about the financial. First of all it's not the third and fifth largest pharmaceutical company, it's two of them are two of the top five pharmaceutical companies so didn't phrase it's one, two or three because then we'll disclose the flow dynamics.
Okay, I just want to make sure that these are two of the largest pharmaceutical companies and we're not going to rank them. The second one that I am I really glad that you asked this question is this, this company went from signing this deal at the last week in December to a going live in actually in about four months and when you think about the notion of one of the top three pharmaceutical companies going live on the multitenant SaaS platform across the globe in such a short period of time it's really world record.
And why is that because our solution is really one that is meeting the industry in it, we also used HI-led deployment mechanism and working closely with the customer and system integrator. We're able to bring this to deployment in a short period of time.
But that's [indiscernible] and I'll turn this to Mark to speak about how it is the P&L.
Mark Tisdel
Sure Terry, so not to get specific on the deal themselves but one of the deals is 100% line 2 and the other deal has both line 1 and line 2 elements to it. As we've talked about in the past again revenue recognition upon the implementation which normally begins within a couple of weeks of the deal being executed.
So we see impacts or we will see impact going forward on both of those transactions.
Terry Tillman
Okay and Mark maybe just a final question relates maybe to something you can help me with, as we look out over the next couple of years of line 2 on the revenue or the income statement, in terms of the revenue segmentation, how material could it be in terms of this shift from on-prem to on-demand and your customer shipping the SaaS, how much of a revenue growth engine could that actually be specifically? Thank you.
Mark Tisdel
Sure and I think Zack probably would want to add color to this, as well. From a numbers' perspective Terry, the answer is significant.
We're seeing as we've indicated earlier in the call extremely high demand for transactions that are recurring in nature and we have ability to talk about before with Revenue Management as a Service to convert our existing customers to a subscription basis and obviously with a large customer base that we have that's a significant amount of revenue, so not only from new customers but also from existing customers there is a tremendous amount of opportunity to increase our line 2 revenue.
Zack Rinat
And I just want to add that, I believe that we have an opportunity to accomplish work that we said that we are going to accomplish. And the early indicators from this quarter is particularly strong which is to do two things which is to continue to grow the business and to at the same time continue the percentage of recurring revenues, so both improving the growth and the quality of the revenues at the same time.
Operator
Thank you, we have reached the end of our question-and-answer session. I would like to hand the floor back over to management for closing remarks.
Zack Rinat
Thank you again everyone for joining the call today. I am very pleased with the improvement that we have delivered through the first half of our fiscal year and we plan to continue our momentum across several fronts through the rest of fiscal year 2015 and into the future.
Thank you very much for your interest in Model N and we look forward to speaking with you again soon.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time and thank you for your participation.