Aug 5, 2014
Executives
Greg Kleiner - Investor Relations Zack Rinat - Chairman and CEO Mark Tisdel - SVP and CFO
Analysts
Darren Jue - JPMorgan Nandan Amladi - Deutsche Bank Tom Roderick - Stifel Nicolaus Terry Tillman - Raymond James & Associates Scott Berg - Northland Capital Markets
Operator
Welcome to the Model N Third Quarter Fiscal 2014 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 would 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 third quarter fiscal year 2014 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.
Our press release was issued after close of market and is posted on our website with this call as being simultaneously webcast. The primary purpose of today's call is to provide you with information regarding our third quarter fiscal year 2014 performance in addition to our financial outlook for our fourth quarter and full year fiscal 2014 and our preliminary guidance for 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 filed in documents with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our quarterly reports on Form 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 to your questions, 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 may be 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 third quarter fiscal year 2014 press release, periodic SEC reports, and the webcast replay of this call, which will be available for the next 45 days.
Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period for our fiscal 2013. And with that, let me turn the call over to Zack.
Zack Rinat
Good afternoon, everyone, and thank you for joining us today to discuss our results for the third quarter of fiscal year 2014. Our results for the third quarter were within the guidance range on both the top and bottom line.
Importantly, we believe that we have reached the turning point and that the third quarter important results will be the trough for our revenue. We are making consistent progress including our sales execution.
I believe that with Chris Larsen, as our Chief Sales Officer and Shail Khiyara as our Chief Marketing Officer, that we have the right leadership in place. We increased our capacity in the past quarter of making key hires in both sales and marketing.
This leadership and improved execution have increased our confidence in the outlook for the upcoming fiscal year. Mark, will walk you through some early thought on fiscal year 2015 in a moment.
For the third quarter, we made solid progress on our growth initiatives and the consistency of our business. We signed a number of upsell and renewals with existing customers, plus some good activity with some of the newer focus point, like midmarket and our REVVY Global Price Management product.
We also had some significant go-lives during the quarter. In terms of upsell, we completed deals with both AbbVie and Actavis during the quarter.
AbbVie, a top 10 pharma company extended the Model N footprint within the company. In Q3, the aided advanced reporting allowed them to gain further value from the existing implementation of our transactional systems.
Actavis added additional users to support both the organic user growth and the purchase of Forest Lab. Further leveraging the initial investment in Model N as the platform, that supports the aggressive M&A activity.
These two examples are indicative that our land and expand strategy is working well. In renewals, we signed extension to SaaS deals with both Amgen and Respira in the past quarter.
We also signed a deal with Sizewise, a global medical equipment manufacturer, with more than 60 locations across United States, Europe and Canada. Sizewise will be leveraging Model N's commercial suite of revenue management applications, including price impact, using the Model N express implementation methodology.
These deals are represented sample of the progress we are making in the midmarket which we believe is underserved. Our REVVY Global Price Management product, help us to aid a new customer LEO Pharma, an emerging European pharmaceutical company with more than $1 billion in sales.
LEO will be implementing the REVVY Global Price Management application over the coming months across all the affiliate businesses and distribution partners worldwide. We also completed two major go-lives in the quarter with both J&J and Merck.
Completing the implementation at Merck is a tremendous validation of our platform and its ability to work in a scale at one of the largest pharmaceutical companies. This was a transformative project for Merck as they tend to spread revenue management processes into a strategic, integrated, and end-to-end business processes, leveraging our revenue management application suite.
The system will deploy not only fully aligned revenue management processes of the Merck generic and Schering-Plough entities but replaces a massive set of heavily customized legacy application. This was a tremendous effort on both Merck and our side in a significant milestone for both companies.
With J&J, we completed a major project with several of the medical device divisions, that allows them to move off a legacy system and consolidate a large portion of the commercial processes on our platform. On the product side, we announced a number of important enhancement over the course of the past quarter.
In REVVY Global Price Management, we released both new versions and the product expansion. The spring 2014 release, including enhancement to governance, usability and reporting capabilities.
We follow this announcement with the released of the Model N Launch Sequence Optimization Solution or LSO for short. We believe new product launches can be the most critical and defining moment in the pharmaceutical industries product lifecycle.
And at the first six months of the launch, can establish the products revenue trajectory for the next several years. A suboptimal launch price or sequence can result in millions of dollar of lost revenue for the pharmaceutical manufactures.
LSO will help pharmaceutical companies to define launch timing and prices, to maximize the revenues and margins. We also released an expansion to the Model N regulatory update program.
A component of our government compliance solution to help our customers comply with the latest governmental reporting requirements. Regulatory change as you may know introduces complexity and potential for both organizational and reputational risk.
One more price calculation can cost millions of dollars in lost revenues and enormous fines. Our new offering has been very well received by both our customers and prospects.
I'm pleased with our progress and the direction we are heading for fiscal year 2015 and beyond. We have stayed and continue to stay through to our compass of building a strong leadership team, listening to our customers, and continuously innovating.
We still are not back to where I would like to be from a consistency point of view. But we have made very good progress on our sales execution throughout this year.
We have number of exciting growth opportunities both within our installed base and with new customers. We continue to believe in the sizeable opportunity in front of us in the revenue management market.
Let me turn the call over to Mark, to discuss our financial results and guidance in more details.
Mark Tisdel
Thank you, Zack. Total revenue for the third quarter was $19.3 million, within our guidance of $19 million to $19.5 million.
This compares to $27.2 million in total revenue in the year ago period. The year-over-year decline was driven by the sales execution issues discussed in recent periods with particular concentration in licensing and implementation line.
However, as Zack mentioned earlier, we believe that Q3 will mark the low point for our revenues as we're seeing the results from our efforts to improve our sales execution. As communicated previously, with the record bookings in the first half of fiscal year 2014.
Within total revenues, license and implementation revenues were $8.1 million and SaaS and maintenance revenues were $11.2 million. In the third quarter of fiscal year 2014, the amount of revenue coming from existing customers to generated revenue in each of the last four quarters was $84.7 million compared to $85.9 million in the third quarter of 2013.
Before I move on to profit and loss items, I would like to preface my comments by pointing out that I was describing non-GAAP results from this point forward. For the third quarter of fiscal year 2014, these items exclude $2.7 million of stock compensation charges, $83,000 of amortization from intangible assets, $80,000 in compensation charges related to the LeapFrog acquisition, and an adjustment to our restructuring result of $43,000.
Gross profits for the third quarter were $10.6 million compared to $15.5 million in the third quarter of fiscal year 2013. Similar to recent quarters, gross profit in this quarter includes an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch of our REVVY CPQ products.
Overall gross margin in the quarter was 55%, compared to 57% in last year's Q3. This decline largely reflects our continued investment in the SaaS and infrastructure and support organization, as well as the reduction in overall revenue as highlighted previously.
Research and development expense was $4.5 million compared to $3.8 million in the third quarter of fiscal year 2013. Sales and marketing expense was $5.9 million compared to $4.5 million in the year ago period.
We continue to invest in sales and marketing personnel. G&A expense was $4.1million compared to $3.5 million in the third quarter of 2013.
Operating loss for the period was $3.9 million compared to an operating profit in Q3 of last year of $3.7 million and it's a high end of our guidance of an operating loss of $4 million to $3.5 million. Net loss in the third quarter was $4 million compared to net income of $3.6 million in the third quarter of fiscal year 2013.
This produced a net loss per share of $0.16 based on a fully diluted share count of 24.8 million shares compared to a net income of $0.14 based on a fully diluted share count of 26.1 million shares in the third quarter last year. This was within our guidance of a net loss of $0.16 to $0.14 per share.
Adjusted EBITDA for the third quarter was negative $3.1 million compared to a positive $4.2 million in the year ago period. We ended the third quarter with $103.2 million of cash and short-term investments, up slightly from $101.7 million at the end of the second quarter.
Accounts receivable at the end of the quarter was $17.9 million, down from $20.4 million at the end of the second quarter and driven primarily by strong collection efforts in the quarter. Our total deferred revenue was $28.7 million at the end of the quarter.
As mentioned previously, we believe our deferred revenue balance is not a meaningful indicator of the business activity during a particular quarter, as the timing of invoicing under our contract impacts this item, because we do not bill our customers upfront for all total contract values. For the third quarter, cash flow provided by operations was $2.3 million, which was considering CapEx of $1 million produced a free cash flow of $1.3 million.
This compares to cash provided by operations of $1.8 million in third quarter of last year, which after considering $300,000 of CapEx and $1 million of capitalized software produced a free cash flow of $500,000. Similar to our prior commentary in regards to our receivable 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 within our contracts.
Moving on, let me outline our guidance for the fourth quarter of fiscal year 2014, resulting expectations for the full fiscal year 2014 as well as some initial thoughts on fiscal year 2015. For the fourth quarter ending September 30, we expect total revenues to range from $19.5 million to $20 million.
Non-GAAP loss from operations in the range of $4 million to $4.5 million. This would lead to non-GAAP net loss per share in the range of $0.16 to $0.18 based on a weighted average count of 25 million shares.
Accordingly, for fiscal 2014 as a whole, we now expect total revenues to range from $81 million to $81.5 million. Non-GAAP loss from operations in the range of $10.5 million to $11 million, and this would lead to a non-GAAP net loss per share in the range of $0.45 to $0.47 based on a weighted average share count of 24.4 million shares.
In addition to the formal guidance, I would also like to add a few comments about the remainder of this fiscal year and our outlook for fiscal year 2015. As Zack eluded too earlier, we have increased confidence in our outlook for fiscal year 2015 based on continued improvements we have seen in the business, pipeline and the ability to execute consistently.
At this point, we are comfortable estimating revenue growth for fiscal year 2015 in the low to mid teens. We'd expect improvement in our quarterly growth rates throughout the year with the business exiting the year at one year historical growth rates.
As we're finalizing our investment plan for fiscal year 2015, it is premature to provide any precise estimates on profitability at this point. However, at a high level we would expect to report operating losses in fiscal year 2015 at a slightly lower compared to our fiscal year 2014 as our business returns to grow.
We expect to see some positive operating leverage on these higher revenue levels but not all of that will drop to the bottom line as we will continue to invest in growth. We will provide further detail on our Q4 conference call.
So, in summary, I believe we have made further progress bringing the company back on track. We remain focused on growth initiatives in executing on our strategic plans for the upcoming year.
On a personal note, I look forward to working with you all and meeting many of you over the next coming quarters. We will now open the floor for your questions.
Operator
Thank you. (Operator Instructions) Our first question is from Sterling Auty of JPMorgan.
Please state your question.
Darren Jue - JPMorgan
Hi, thanks. It's actually Darren Jue on for Sterling.
I'm just wondering, given that the guide for fiscal 2015 revenue was quite a bit above where we were modeling, can you give us a sense for just how much visibility you have into that revenue? To what degree has that revenue already been booked?
Mark Tisdel
So, thank you for asking the question. When you look at the guidance that we provide for fiscal year 2015, its combination of three elements.
I think the first one is that as we mentioned we made tremendous progress this year in terms of execution for business on both sales and marketing. And the second one is that when we look at what we have currently in the final, and also the fact that we add a significant sales and also marketing capacity this quarter, we have confidence that we will be able to leverage on this opportunity.
And the third thing is that when we look at the growth initiatives that we have for our next fiscal year 2015, we also feel confident about them. So that gave us, actually the ability to guide – ability to guide this time.
Darren Jue - JPMorgan
Okay. Thanks.
As a follow-up, you just mentioned you feel confident in terms of your sales and marketing capacity. Could you comment, also, on the adequacy of staffing within the services organization?
Mark Tisdel
We feel that we have the capacity to meet obviously the demand for this year. We are still in hiring farther capacity.
But you have to remember also that, we go to market is to work very closely with the partners and we deliver the partners in go-to-market strategy. And when you look at the combination of that of our internal growth the way we are scaling the business in our partnerships, we feel that we have very good demand internally and externally to meet the requirements of the market.
Unidentified Analyst
Okay. Great.
Thanks for taking my questions.
Operator
Our next question is from Nandan Amladi of Deutsche Bank. Please proceed with your question.
Nandan Amladi - Deutsche Bank
Hi, good afternoon. Thanks for taking my question.
Zach, you described quite a few upsells with the existing customer base. In terms of the new bookings over, say, the last two quarters, and as you look ahead, orders of mix of the land deal versus the expand deals and has that mix changed, say over the last 12 months or so, as you work through the execution issues that you described?
Mark Tisdel
Nandan, when you look at the market as a whole, we feel that the market is under penetrated and its true for both our installed base and for - it comes from the bigger market. So we feel that there is an opportunity for us on both areas to go and to expand farther.
And in the previous quarter, we signed two major deals with both J&J and Striker where we expanded our footprint very significantly in both of this kind of companies. In addition when I look at this year and to your questions about the last two quarters, we keep a very good momentum especially on the midmarket but not only on the midmarket.
And the midmarket has been very good for us right now in terms of market expansion with the packaging of the product and with express offering that we have to these customers where we implement these products out of the books with best practices on a fixed bead and a fixed time, it was very well received.
,
So I hope this will answer your questions.
So I hope this will answer your questions.
So I hope this will answer your questions.
Nandan Amladi - Deutsche Bank
Yes. Thank you.
Operator
Our next question comes from Tom Roderick of Stifel. Please proceed with your question.
Tom Roderick - Stifel Nicolaus
Hey guys, good afternoon. So, first of all, congratulations by turning the bookings picture around here and signaling the third quarter as the low watermark coming up.
That's certainly good news. If you look at what's going on within your bookings picture, you called to mind a few of these more sizable deals.
AbbVie was certainly a nice one you announced in the quarter. What's changed within the execution of the sales force and the tenor of the deals relative to where they were last year at this time and as you went through the fall?
How have you managed to get these deals over the goal line and what are some of the factors behind that? Is it macro?
Is it sales execution? How do you continue these trends?
Zack Rinat
Thanks for the question. When I look at this, it's mainly a focus on our own execution and I would say the broader way strategy.
Tom, if you look at what we have done since the beginning of the year was really to focus on the sales process and on the sales execution and on alignment and a lot of critical ingredients that really created the foundation for a strong sales organization. In addition to this, we did what I conceive to be a very good hiring in the next level under Chris Larsen, with a strong leadership both in the U.S.
and in Europe. And the third thing is that we increased the capacity over time.
We did what I consider to be a very good hiring over the last three to four months. We believe that's even going to improve the execution of the company.
And I think what we were able to do is really to focus on both the installed base and on the expending opportunities, and go and take these deals off the table. And I think at the same time, also to go into evolve and increase the funnel that is going to create the future opportunities for the company.
Tom Roderick - Stifel Nicolaus
Perfect. Thank you.
One quick follow-up question. As you look at the revenue growth into next year, it still looks as though the operating losses will continue to expand on the higher revenue level.
Where, incrementally, do you want to invest in the business? Is this predominantly sales and marketing?
Should we see more leverage on that line? Or, rather, invest in R&D?
Kind of curious how you we should think about our models from the OpEx standpoint. And bigger picture, what's the right revenue run rate, whether it's annual or quarterly revenue run rate level by which you think that you could turn a profit at this point?
Zack Rinat
So, first of all a clarification and then going back to some of your questions. First of all, we said that it's too early for us to guide on the bottom line.
We're still working through the plan for next year. We spend a whole week, the entire Executive Management team on driving the strategy for the next year.
And we feel confident about where we are going. But we haven't really finalized the bottom line and we are not in a position to guide.
Obviously, we will guide in the next earning calls. What Mark mentioned in his comment was that we are going to reduce the losses for the company.
And where we are working on right now, is where we need to make farther investments. We have couple of strategic initiatives that we feel are going to be a growth driver for the company.
We spoke about the midmarket in the beginning of last year and as you saw that's been a very good momentum and drive for the company. We're also developing this product with salesforce.com, REVVY, SaaS application suite for semiconductors which we also believe is going to be a very good growth driver for the company.
And now with the little shift that we have in sales and marketing, we are investing farther in sales and marketing both in the U.S. and in Europe.
So, that's why we're going to invest vast majority of our resources on areas we think are going to be major growth driver for the company and in sales and marketing and driving the potential that we see in the markets to fruition.
Tom Roderick - Stifel Nicolaus
Great. Thank you, guys.
Operator
(Operator Instructions) Our next question is from Terry Tillman from Raymond James. Please proceed with your question.
Terry Tillman - Raymond James & Associates
Hi, good afternoon, guys. Thanks for taking my questions as well.
Mark, a quick question for you and appreciate at least the early view for next year on the revenue and, directionally, the operating loss. That's helpful for us.
But I'm curious, though, if we were we were to segment it between the licensed and implementation versus the subscription or SaaS and maintenance, anything to think out the relative rates of growth in relationship to total revenue growth?
Mark Tisdel
Well Terry, we're not ready at this point to give guidance on fiscal year 2015 between the two line items. I would expect as we indicated previously when we had very strong bookings in the first half of fiscal year 2014, obviously that's going to drive revenue as we move in 2015 plus deals we booked for the remainder of this year.
Terry Tillman - Raymond James & Associates
Okay. I guess, Zach, maybe this is for you.
You talked about a variety of successful renewals and then upselling and cross-selling. I'm curious, within some of your larger enterprise customers, particularly on the pharma side, what are you seeing in terms of as they either -- you upsell or cross-sell other solutions.
Has there been a more notable shift to SaaS versus doing additional license on premise deals? Have you seen any shift that surprised you?
Or is it playing out as you had anticipated?
Zack Rinat
When you look at the cross-sell and upsell opportunities that we have, I would say in general, they follow what I thought we're going to see in the market. And what we see that when you look at expansion in the very large enterprises, most of it is actually on [PRIM] (ph) and I would say that the other aspect of this is that when you look at the newer product that we have, such as the REVVY Global Price Management, we only offer this as a SaaS or some other product.
So, this is basically a product that really augments what the companies have currently from a transactional system and we only sell it as SaaS. So, that's the two trends that we see when we look at expansion of current implementations already on PRIM, but the newer products are going to SaaS.
Terry Tillman - Raymond James & Associates
Okay. My last question, Zach, for you, in terms of the midmarket as an opportunity that you embarked on last year and you're having some success.
Should we think of that is the primary driver of your new logos. New customer sales are going to be predominantly in that midmarket?
Anything you can say about economically, what is the deal size like there on average versus more of your Amgen or J&J types when they become another customer? Thank you.
Zack Rinat
Yeah, so when you look at number of customers, number of new customers, number of new logos, naturally they're going to come from the midmarket. And we think about this as a way to grow with these companies.
When you look at the history of Model N, in 2004 I believe we walked with this relatively small company called Gilead and you know what happened with this company over the decade that we walked with them. So, I believe that these companies are going to provide us with wonderful opportunity to grow with them.
And now that the product is packaged in a very succinct and delivery way, we are really in a position where we can partner with them. In addition to this, when you look at vast majority of the transactions that we did with the midmarket, it's all basically SaaS and it's also helped us with recurring revenues.
So, I think they're going to be a wonderful opportunity for us to expand and also to grow and also an opportunity to expand our recurring revenues.
Operator
Our next question comes from Scott Berg from Northland Capital Markets. Please proceed with your question.
Scott Berg - Northland Capital Markets
Hi, Zach and Mark, congratulations on a nice sales quarter, here. Two questions for you.
First of all, Zach, on the sales improvements in the quarter, the upsells. Are customers buying something different today than they did, say, 12 months ago?
Or is it the same type of products, the revenue management products that they're just bringing to new divisions?
Zack Rinat
So, when we look at the land and expand strategy that we have, we see couple of versions of this. The first version is that companies are expanding these to other divisions.
So, you stop doing one division and you expand to other divisions. The second one is that you expand it to new geographies.
So, you take it from an implementation that was done in the U.S. to other countries or to region.
Then you have an expansion where companies are buying more seats, more users, either because of organic or inorganic growth and then companies are buying more application in order to expand the footprint to do it. So, when you look at this we have a lot of growth drivers within the installed base.
And we see opportunities in all of them. When you look at these from a product point of view, we have product that we sold 12 months ago and we keep improving them and also we have some new products such as the global price management and others that provide us with an opportunity to upsell, to expand and actually to sell through other regions sometimes.
Scott Berg - Northland Capital Markets
Great. My last question is, is with the improved sales execution in the guidance for next year, which was above our estimates, as well, are you viewing this growth opportunity right now as a mid-teens growth opportunity on an annual basis, plus or minus?
Or do you think you can get back to the 20%-plus growth opportunity on a more sustained basis, likely in 2016, maybe?
Zack Rinat
So, I am not in a position to guide in this direction right now. I just wanted to reiterate what we said in the call, what is said in the call is that, regard right now to low to mid-teens, because we wanted to give you a directional.
We also said that when you look at the exit quarter for next year, we're going to be in near or at a historical growth rate. When we're going to exit the last quarter of the - and we'll give to you much more clarity in the next quarter.
Scott Berg - Northland Capital Markets
Great. That's all I have.
Thank you.
Operator
Ladies and gentlemen, this concludes the Q&A portion for today's presentation. I would turn the floor back to Mr.
Zack Rinat, for closing comments.
Zack Rinat
Thank you everyone for joining the call today. As I mentioned, I am pleased with the continued improvement that we made through our business in the last quarter.
And we're very much looking forward to return the company to growth and executing on this tremendous opportunity that is in front of us. And I also thank all of you for the interest in Model N.
And we look forward to speaking with you again soon.
Operator
This concludes today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.