Aug 8, 2018
Executives
Staci Mortenson - IR, ICR Jason Blessing - CEO David Barter - CFO
Analysts
Steve Wardell - Chardan Capital Markets Brian Peterson - Raymond James Chad Bennett - Craig Hallum Jackson Ader - JP Morgan Gene Mannheimer - Dougherty & Company Ryan MacDonald - Needham & Company
Operator
Greetings and welcome to the Model N Third Quarter Fiscal 2018 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.
It is now my pleasure to introduce your host, Staci Mortenson, Investor Relations for Model N. Thank you.
You may begin.
Staci Mortenson
Good afternoon. Welcome to the earnings results call for Model N's third quarter fiscal year 2018, which ended on June 30, 2018.
With me today are Jason Blessing, Chief Executive Officer and David Barter, Model N's Chief Financial Officer. 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 information regarding our third quarter fiscal 2018 performance and our financial outlook for our fourth quarter and full-year fiscal 2018. Commentary made on this call may include forward-looking statements.
These statements are subject to risks and 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.
Should any of these risks or uncertainties materialize or should any assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. In addition, today's call, we will discuss non-GAAP financial measures.
These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP results. Reconciliation of the non-GAAP metrics to the nearest GAAP metric are included in the earnings release issued today, which is available on our website.
I encourage you to visit our Investor Relations website at investor.modeln.com to access our second quarter fiscal year 2018 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 third quarter fiscal year 2017.
With that, let me turn the call over to Jason.
Jason Blessing
Good afternoon and thank you for joining us today. I'm very pleased to be speaking to you on my first earnings call as the CEO of Model N.
Over the last 90 days I've split my time meeting with customers, employees, investors and analysts. I'd like to thank everyone for the warm welcome and share a few observations.
First, we have very strong relationships with our portfolio of blue-chip customer in life sciences and high tech. Each has made a significant commitment to us and in return we continue to deliver innovative products and top-notch professional services and support.
Our ability to serve our customers with industry-leading cloud services over the coming years also makes for a very exciting future. Second, it's clear to me that the cloud-based software we provide to our customers is absolutely mission-critical.
We deliver a powerful set of cloud services that enable our customers to grow both revenue and profit, drive business efficiencies and remain compliant with the ever-changing regulatory environment. Our focus on innovation and serving customers through our SaaS business model will enable us to capture more of our TAM, while increasing the value we deliver to our customers.
Moving our customers to the cloud and selling them our new products and services, represents a compelling opportunity for both of us. The future is very bright for Model N as we complete the transition to a single business model and serve our customers through the cloud.
Third, I would like to thank everyone at Model N for the tremendous welcome. I've been incredibly impressed by our team and the deep domain expertise they have in our core markets.
I would also like to thank Zack Rinat, our Founder for the incredible support he has shown for me, our customers and Model N during the transition. Our third quarter results naturally build upon our performance in the first half of the year and demonstrate healthy progress towards our annual goals.
Third quarter revenue grew 16% and adjusted EBITDA increased to 3.1 million, which represents an 8% margin. These results are above the top end of our guidance range and reflect our continued focus on execution and evolution to the SaaS business model.
One of the reasons I joined Model N is the opportunity to leverage my experience over the last decade of working in successful cloud companies, including five years at another vertical SaaS company to drive our evolution. My view is this market due in part to its heavy regulations and risk aversion has been more cautious about moving critical business applications to the cloud.
However, I see this market following the same pattern we've now seen in every other enterprise software market and will hit a tipping point where cloud is not only accepted, it's expected. Model N is the only vendor positioned to capitalize on this inevitability in revenue management.
We continue to have a healthy dialogue with our customers around their cloud transition and I expect momentum around our cloud products to continue to build over the next 12 to 24 months. The collaboration with our early adopter customers continues and we're encouraged by the work we are doing together.
As we mentioned before, the cloud transition is a multiyear effort for us and for our customers as they adapt and redefine how they operate. We will continue to be flexible and work with our customers on their timing as we move them to our cloud offerings.
We believe trust is important for maintaining strong customer satisfaction and renewals, which are cornerstones of the SaaS business model. During the quarter this strong customer focus did yield results as we had strong up-sell deals including several new sandbox pods.
Over the course of the year, we've signed and implemented nearly a dozen pods. Sandbox pods are nonproduction systems that give customers access to the latest version of revenue cloud.
This model allows customers to get more comfortable moving mission-critical systems to the cloud. The pods also allow us to work with our customers on their cloud roadmap and help pave the way for future large-scale cloud deployments.
As an added benefit they also generate incremental ARR for Model N. As previously discussed, given the health of our business we are also providing customers with incentives to accelerate cloud adoption.
One mechanism is ramping deal structures where we increase ARR over a multiyear contract as customers drive more value from the system and their investment. Deal ramping is a common construct that enterprise SaaS companies use to entice customers to move to the cloud and we expect to continue to use this lever in future transactions.
During Q3, we utilized a ramp deal structure in a new logo deal with Nevro Corporation. Nevro is a mid-market medical device company with over 300 million of revenue who purchased our provider management and provider intelligence products.
In 2015 Nevro had less than 100 million of total revenues. As companies rapidly scale, they need access to modern enterprise class software to help manage the complexities of their growth and ene markets I highlight Nevro because it's a great example of where our cloud delivery model and the associated economic levers enable us to profitably serve in emerging enterprise.
With the shift the SaaS Model N will continue to serve the largest companies as we always have, the cloud delivery enables us to also profitably serve a broader portion of the market. While the SaaS business model represents an exciting and bright chapter for us, customer success is also a key focus and core tenant of driving strong recurring revenue renewals.
Q3 was a very significant quarter for us as several marquee customers had successful go-lives and started realizing the benefits of our software. Some of the highlights include go-lives at Eli Lilly, Fresenius, BioMarin, Pfizer, Diodes, CSL Behring, Johnson & Johnson and Micron.
I would like to share a few details so you get better sense for the positive impact our software has for customers. Diodes is a leading global semiconductor manufacture, serving the consumer electronics, communications, industrial and automotive market.
Diodes runs all of its global pricing, quoting, contracting and channel management functions on a revenue cloud. Model N software has supported diode's business as they have scaled from 400 million to over a billion in revenue.
Diodes' recently leveraged the latest version of our platform to drive a global rollout of the shift and debit process across all of its global channels, helping the company increase revenue through consistent price execution and better visibility into end market pricing. Diodes also added our channel data management solution to collect, correct and cleanse the data of tens of thousands of end customers served by over 90 sales channels.
Our products are helping Diodes getting better visibility into channel sales and market share, so they can better align their sales and marketing investment. This deployment also enabled Diodes to integrate a recently acquired company and establish a unified platform for commercial operations this is another great example of where the cloud delivery model and our products enable a customer's business strategy of growing through acquisition.
ICU Medical develops, manufactures and sells technology used in vascular therapy, oncology and critical care applications. ICU Medical recently acquired the Hospira Infusion division from Pfizer and the combined company is modernizing the revenue management systems on the Model N revenue cloud.
During the quarter ICU Medical's Canadian business went live on our platform with contracting, pricing and reporting. The Canadian business is also ramping up to include rebates and chargeback processing and payment contract lifecycle management and accruals.
In addition to strong sales and customer success, we continue to innovate on our product portfolio as evidenced by our summer release. For customers large and small, we believe our three times a year release cadence is the best way to introduce innovation to our platform and stay current on regulatory requirements.
As a reminder at our Investor Day earlier this year, we indicated that our product team is focused on three core themes, which are cloud optimization and user experience, business intelligence and industry network solutions. With the summer release, business users now have access to real-time analytics and recommendations during the quoting process.
This new capability enables optimal pricing decisions for both direct sales as well as indirect channel sales. Additionally, enterprise sales teams can now manage complex pricing schemes and rebate programs during the contract lifecycle process this allows our customers to optimize net pricing at the time of sale and then improve contract compliance and overall contract economics over the lifecycle.
In response to the ever-changing international regulatory environment business users now have access to multiple reference pricing baskets and configurable rules, which enables improved pricing, compliance and launch sequencing. We also continue to focus on optimizing our cloud infrastructure which is what gives us confidence that we are on the path to driving better product gross margins over the next several quarters.
These are just a few examples from our summer release. I'm very excited about our product roadmap as we continue to channel all of our new innovation into our cloud products.
In conclusion, we are making great progress as a company on our commitment to delivering profitable growth while helping our customers with their digital reinvention strategies. It has been an exciting 90 days as my discussions with customers and employees reinforce my belief that Model N has a great opportunity ahead of it.
With that, I will turn the call over to David, David?
David Barter
Thank you, Jason. This was another strong quarter for Model N.
There were a number of highlights including staff and maintenance revenues, adjusted EBITDA and free cash flow. In the third quarter SaaS and maintenance revenues were $35.6 million and included in this is approximately 24.9 million of recurring revenue and $10.7 million of professional services related to the implementation of SaaS subscriptions.
Recurring revenue increased sequentially at a healthy rate. Professional services increased in line with our customer go-live activity and was a bit higher than forecasted.
License and implementation revenues were $4 million or $2.2 million decline from our Q2 results. This was slightly lower than our expectation and reflects our drive towards 100% SaaS.
We continue to expect a meaningful sequential decline in Q4 as we focus on SaaS and burn down the on premise implementation backlog. Total revenues for the third quarter were $39.6 million, a 16% increase from $34.2 million in total revenues in the year ago period and above our guidance range of $39 million to $39.5 million.
Before I move on, I want to remind you that my commentary will be focused on non-GAAP results, which exclude the impact of purchase accounting and the amortization of the intangible assets. It also excludes the impact of stock-based compensation, which was higher than usual in the third quarter due to a one-time expenses do with the resignation of our CEO and the related transition agreement reconciliation of non-gap to gap results is provided with our earnings press release issued earlier today.
Non-GAAP gross profit for the third quarter was $24.3 million compared to $21.4 million in the third quarter of fiscal year '17. Overall non-GAAP gross margin in the third quarter with 62% compared to 60% in Q3 during the quarter the business made healthy progress in our cloud optimization initiative.
This will enable the business to deliver the recurring revenue gross margins and in fiscal '19 that we outlined in Analyst Day. Non-GAAP operating expense was $21.9 million in Q3 compared to $23.9 million in Q3 of last year and 20.9 million in the prior quarter.
Non-GAAP operating profit for the period was $2.5 million compared to a loss of $2.4 million in Q3 of last year. This was ahead of our non-GAAP operating profit guidance of $1.2 million to $1.7 million.
Non-GAAP net loss in the third quarter was $2 million compared to a net loss of $4.1 million in the third quarter of last year. It's important to remember that the $3.1 million of cash and non-cash refinancing expenses we announced in May are reflected in the non-GAAP net loss.
We produced a non-GAAP net loss per share of $0.07 based on 30.7 million shares compared to a net loss per share of $0.14 based on 28.9 million shares in the third quarter of last year. This was ahead of our guidance of non-GAAP net loss per share of $0.09 to $0.11 per share.
Adjusted EBITDA for the third quarter was positive $3.1 million, a meaningful improvement compared to a negative $1.5 million in the year ago period and well ahead of our guidance range of $2 million to $2.5 million. At the end of the third quarter total deferred revenue was $55.8 million, which was in line with our expectations.
We ended the third quarter with $57.6 million of cash and cash equivalents up and $51.8 million at the end of the third quarter. Free cash flow from operations with over $4 million.
This compares to cash flow used in operations of negative $2.7 million in the third quarter of last year. Before I provide guidance for Q4 and fiscal year 2018 like to build on what I shared on our last call and provide some updated perspective on the principles guiding the financial management of the business.
We remained focused on several key initiatives. One, transitioning the business to 100% SaaS.
For fiscal year 2018, we still expect SaaS and maintenance revenues to be between 86% and 88% of total revenues and more importantly, it will be well above 90% in Q4. This reflect our focus on building the SaaS business.
The backlog for fiscal year 2019 is down to approximately $1.5 million which was ahead of our Analyst Day forecast. The backlog will be burned off the first two quarters of fiscal year '19.
Two, we feel extremely confident in meeting our commitment to be profitable in each quarter. The entire company is focused on growing the business while delivering meaningful levels of profit.
Adjusted EBITDA was strong again in Q3 and were driving the business to deliver healthy profit in Q4 while optimizing the business for the FY '19 margins that we outlined at Analyst Day. Three, building the business to generate sustainable levels of cash flow.
We expect to be free cash flow positive in Q4 and as a result we also expect to be free cash flow positive for the full fiscal year which was a year ahead of schedule. As previously discussed, we pay down $5 million of debt at the beginning of July in line with the terms of the selling them.
We also paid down a small portion of the debt associated with the new term loan from Wells Fargo we announced in May. With the improved outlook for the company, we are also planning to reduce our debt by another $5 million in the first half of fiscal '19.
Moving on, let me now outline our guidance for the fourth quarter of fiscal year '18 as well as for the full year. For our fourth quarter ending September 30, 2018, we expect total GAAP revenues to range from $35.2 million to $35.7 million.
This reflect the step down in license and implementation revenue that I've been highlighting for the last few quarters. It also reflects a return to more normal mix of professional services for SaaS implementations.
Professional services as a percentage of revenue was higher than normal in Q3 as we work towards the project milestones and customer go lives. The guidance also reflects recurring revenue growth in line with our typical range.
Non-GAAP income from operations is expected to be in the range of $0.5 million to $1.0 million. This would lead to a non-GAAP net loss per share in the range of $0.03 to $0.01 based on a weighted average share count of 31.5 million shares.
Adjusted EBITDA is expected to be in the range of $1.2 million to $1.7 million. As mentioned on our last earnings call, our Q4 adjusted EBITDA exit rate will not be reflective of the underlying adjusted EBITDA a run rate of the business.
We believe our business is set up very well for improved levels of profitability and cash flow in fiscal year '19 in line with what we discussed at Analyst Day. For the full fiscal year 2018, we are raising the midpoint of our guidance.
We now expect total GAAP revenues to range from $153.1 million to $153.6 million. As we transition the business to SaaS, we expect license and implementation revenues to be approximately 1.5 million in Q4 as we burn through the backlog.
We now expect non-GAAP income from operations in the range of $7.2 million to $7.7 million and non-GAAP loss per share in the range of $0.05 to $0.03 based on a weighted average share count of 30.4 million shares. We are also raising our guidance for adjusted EBITDA.
It is now expected to be in the range of $10.2 million to $10.7 million. Before I turn the call over for questions, I'd like provide a brief update on 606.
As mentioned in our SEC filings and at Analyst Day we will be adopting the new revenue standard through the modified retrospective approach. This means that we will be booking a cumulative catch-up on October 1.
For full year fiscal 2019, I'm still expecting the cumulative catch-up for the recurring revenue to be in the range of $3 million to $4 million, which is in line with what I presented at Analyst Day. We will finish our work in Q4 and present it to our auditors will review so that we are ready for the new fiscal year.
When we report Q4 results, I will provide detail guidance for Q1 and the full-year fiscal 2019, which will include the final cumulative catch up figures, so that it's easy for you to update your financial models. With that, let me turn the call over to the operator for questions.
Operator
Thank you. At this time, we'll be conducting the question-and-answer session.
[Operator Instructions] Our first question is coming from the line of Steve Wardell with Chardan. Please proceed with your question.
Steve Wardell
Hey guys, thanks for my question.
David Barter
Hey thanks Steve. Good afternoon.
Steve Wardell
This is for the CEO, you mentioned meeting with customers. Can you just give us a sense of what are the biggest issues that you found going on in their lives and how does that translate into your product and your feature and functionality?
Jason Blessing
Yeah Steve. So this is Jason Blessing.
I appreciate the question. Great to meet you.
I would say speaking to our customers there is a few things that are going on in their lives right. One, and especially considering that we have such a big footprint in life sciences, that's a very dynamic market right now.
Dynamic markets is going through significant regulatory pressures, significant amount of M&A and significant amount of global competition. And so for that market and generally for the markets that are seeing those type of pressures, our products and helping them manage their pricing manage how they go to market, manage how they sell through complex channels, really help them deal with some things that are very top of mind.
I would also say specifically we continue to see a lot of M&A across all of the segments and particularly as we ported our products to the cloud, that can be a strategic enabler of acquisition strategies for our customers. So yes it's a very dynamic environment right now that we sell into and the regulations, the growth, the competition and M&A are all key drivers.
Steve Wardell
Great. Thank you.
Operator
Thank you. The next question is coming from the line of Brian Peterson with Raymond James.
Please proceed with your question.
Brian Peterson
Yeah, hi, thanks for taking the question. So first off, you guys mentioned some incentives that you were going to be able to get some customers over the cloud, just could you expand on that a little bit.
Jason Blessing
Yeah hi Brian. Thanks for the question.
I'll take that initially. So there's really a couple of things that we're doing to get customers to move.
The first is something that we refer to as ramps and ramps are essentially where we ramp the revenue over the lifetime of a contract to better match up with the deployment that a customer is going through and the value that they're getting for the system -- from the system. This also helps with a fairly common objection that we get of customers not wanting to have to pay for two systems.
Their old legacy on premise system and the cloud system during the deployment. So ramps are certainly a big part of it.
The other I would say are the sandbox pods that I alluded to in the prepared remarks. The reality of the market that we sell into, it's very large but it's also heavily regulated and many of our customers are just very thoughtful about how they manage change in their environment particularly around compliance-based systems.
And so sandbox pod is kind of a prototype environment are a great way to get customers on to be on ramp and moving to the cloud. So those are really the two biggest ones.
Brian Peterson
Yeah, okay. That makes a ton of sense.
And maybe just a high-level one maybe for David in this case, but you guys broke out at the Analyst Day, I think it was 23% is your penetration rate into the top 25 life sciences customers. As we think about that incremental opportunity that 70% plus, can you help us understand how much of that would be the on-premise transition versus incremental and up-sell or cross sell of the portfolio, thanks guys.
David Barter
Yeah absolutely. Thank you, Brian.
Yeah so when we think about I think Brian maybe there's several factors and maybe I can build on your question. Obviously there is a product dimension.
There's kind of a business unit and a geography to mention as well, and then there's absolutely the transition and so the transition plays into certainly part of it, but I think we still have very good opportunity and so there is a very substantial piece of that opportunity that really is along the lines of selling in all of the products and then quite frankly filling or painting in all of the different business units across the geography. And so I think of those really maybe the primary growth levers if you will around building the business and certainly the transition as we try to share is a great economic opportunity but as we think about playing off and growing the business, it's really just one of the -- one of the legs of the -- or one of the vectors that we have available to us.
Operator
Thank you. Our next question is coming from the line of Chad Bennett with Craig Hallum.
Please proceed with your question.
Chad Bennett
Great. Thanks for taking my questions.
So I jumped in at the tail end of Jason's prepared remarks. So pardon me if I am being redundant, but I guess couple things, any type of mention of conversion activity in the quarter and kind of where we are there and in the progress we've made from that standpoint and then any type of update on where we are tracking relative to our staff ARR target exiting this quarter that we gave at the start of the year, thanks?
Jason Blessing
And Chad by conversion progress are you are referring to on-premise the cloud transitions, OPT transition?
Chad Bennett
Right. Yes.
Jason Blessing
So great. Okay.
Good question. I'll take that one.
So I've spent a significant amount of my time in the first 90 days out on the road talking to customers and I will say this in every single one of these conversations the on premise the cloud transition comes up and I would say that all of our customers absolutely view this as an inevitability, not something that may or may not happen. And I consistently hear from customers.
They're excited about a few things. First of all the improved economics of moving to the cloud as well as the new innovation and our roadmap of moving to the cloud.
That said as you know a large part of our install base is in life sciences and we're working with our customers on a very thoughtful transition that addresses their concern around change in their environments particularly around systems that are compliance oriented and so as we've guided in the past I think this continues to be a multiyear effort that starts with discussions, thoughtful planning, mutually beneficial economics and ultimately some type of prototyping and pilot work to get the customer comfortable that we're both ready for the transition. One of the things I believe you did mention in the remarks, it's probably before you joined Chad, we've got about a dozen sandbox pods as we refer to these prototype environments in place today with customers.
So that's a great marker by the way for future projects. I would also say that we are encouraged by our pipeline trend, which is up significantly year-over-year Q4 to comparison of last year and in large part this is due to our customers interest in moving to our cloud solutions.
David Barter
Yeah exactly and then Chad I'll answer a question on the SaaS ARR. I think one of the things Chad as you’ve been tracking the company closely, we've been really quite frankly working hard and I think we communicated this in March.
We started with ramp and we started with Sandbox pods and quite frankly we've layered in some of the other tools like future effect of days to get customers make it easy to say yes. And so I think we've made healthy progress to the $60 million arguably Chad something has been on my mind is obviously making it -- making good progress to being able to grow consistently within those bookends that we shared in March of 12% to 15%.
And so I think we've made good progress to the $60 million. I would say it's less clear whether we'll hit it at the end of this year or in the first half of next year, but what I think what we're seeing in the business is actually really healthy progress and as I look at our pipeline and our opportunities and how we're engaging with customers, I think we're in a good spot with the deal structures were putting into place to grow both the installed base, but also kind of see the growth from the top end.
So I feel like we're making good progress.
Chad Bennett
Great. Good to hear.
Thanks.
Operator
Thank you. The next question is coming from the line of Jackson Ader with JPMorgan.
Please proceed with your question.
Jackson Ader
Great. Thank you.
Good evening, guys.
David Barter
Good evening, Jackson.
Jackson Ader
Jason if we can start with you, now that you’ve been in the seat for 90 days or so and especially in the light of the pipeline growth that you just mentioned and in response to Chad's question, how do you feel like as you look at the current staffing within the business? How do you feel like the level of headcount looks like?
How comfortable are you with it and that specifically may be sales reps, how do you think that's going to trend as you move forward?
Jason Blessing
Yeah thanks Jackson for the question. So let me give you some high-level contact stemming it into the specific question.
As I said when I joined the company and participated on the call 90 days ago, I said I was very committed to the profitable growth path that the company has charted and continues along. We also talk about the size of our TAM.
I think the TAM that we sell into is very high and is very large and very attractive, but as I've mentioned it's also highly regulated. So as a result, customers thoughtfully manage the risk and the rate of change in their system infrastructure.
That said, after being here now for 90 days, I am comfortable with the guidance that we've given historically in Analyst Day of growing topline 12% to 15% over the long run and continuing to make progress on profitability and just to put that number into perspective, you may ask is that good or bad. That number implies that we're growing approximately twice the life sciences software market.
So I do think it's a good growth rate in a highly regulated market and implies that we're taking market share in our core market. If we do see the opportunity to pick up the growth rate and invest more, we're always looking at that, but are still committed to maintaining a nice trajectory around profitability and growth.
Now with respect to your specific question, I think our business is adequately resourced right now. I think we've got a good team, we've got the right sized team and right now it's just about focusing on organic execution and focusing on concluding our evolution on to the SaaS business model.
Jackson Ader
Okay. Great.
Thank you. And one quick one for you David, you mentioned the $3 million to $4 million impact on revenue from 606.
You also mentioned the Analyst Day you'll probably get a little bit of a bomb from amortizing sales commission about $1 million. I just wanted double check if that is still what we should be expecting for 2019?
David Barter
Yeah the commissions is probably the last piece and so I'll provide that update. We're just finishing that review with PWC and that's why I didn’t provide that update.
I've no reason to believe it's going a lot from that but if having completed the final procedures with PWC but that was the reason for leaving it out of the prepared remarks.
Jackson Ader
Okay. All right.
No big deal. Thank you.
David Barter
We're just, like I said we're kind of completing all of the audit work right now.
Jackson Ader
Got you. Thanks.
David Barter
Super.
Operator
[Operator Instructions] Our next question is coming from the line of Gene Mannheimer with Dougherty & Company. Please proceed with your question.
Gene Mannheimer
Thanks. Good afternoon and congrats on a good quarter.
Jason welcome aboard as well. What is the metric on the number of cloud subscriptions per customer right now or is that a number you only get annually and then my follow-up would be on the on-premise backlog, I think I heard you say it will go to zero in Q1 of next year.
So then is it fair to say there will be no longer any perpetual license revenue beginning in Q2 thanks.
David Barter
Gene, we are averaging about the two subscriptions, not just under per customer, and so that's an annual staff that we provide and I think we had put a trend in the Analyst Day presentation and so we'll continue to reverse that as we continue to execute the land and expand motion. In regards to the backlog, I do think it will actually burn into Q2 and so by Q2 of fiscal year '19, I think the on-premise backlog will be fully expired at that point okay.
Gene Mannheimer
Okay. Pretty good.
Thanks.
Jason Blessing
And Gene one thing I would add on top of what David said, two subscriptions per customer and we got over 80 customers now running our apps in the cloud. So again we're seeing nice usage and scale in the structure.
Gene Mannheimer
Terrific. Thank you.
Operator
Thank you. Our final question is coming from the line of Ryan MacDonald with Needham & Company.
Please proceed with your question.
Ryan MacDonald
Hey. Good afternoon, guys.
Congrats on a good quarter. First starting with you Jason, you talked earlier about in the Q&A about that you think that the organization is adequately resourced right now and in terms of size of the team but can you talk about perhaps in terms of strategy, given your experience selling a fast solution and particularly in that manufacturing industry, if there is any sort of tweaks that you would be making or shift is strategic focus to address the opportunity in this new market for Model N?
Jason Blessing
Yeah. Thanks for the question Ryan.
It's a good one. So yeah so I'm 90 days in now and I've spent probably two thirds of my time out in the field meeting with customers and investors and I am really ramping up not on the business very quickly.
There's two things that stand out to me one, and we talked about some of those at Analyst Day. I think there is a significant near-term catalyst with getting our core life sciences market move to our cloud solutions and also selling our core life sciences market more of the products that we built, like global pricing, global tenders, some of our analytics offering.
So I actually think there is still is a lot of juice to squeeze in our core market around life sciences and then yes as you point out, so I actually have a lot of experience in manufacturing having just spent the last five years selling into this market and offer you a couple of thoughts there. First of all, I don't think of manufacturing as a vertical.
I actually think of it is a global economy that is made up of many different sub verticals, sub verticals that have their own unique requirements, some of them have their own unique regulatory requirements as well. So it's a complex -- it's a complex market, but that said we do have a nice growing portfolio of customers in this emerging area for us.
I think in the past we talked about Toro as a lighthouse customer that we're working very closely with in this area and they're also a very happy customer. So it's still early days for us and I do think we need to be thoughtful about how -- what type of prospects we pursue in this market.
I think customers that have complex products, complex channels that they sell to and corresponding rebates that they pay are good fit for us given our heritage in life sciences. But I do think we have to be very thoughtful and choose selectively where we play in the manufacturing space.
I think if we do that well, that can be a very nice complement to a growing life sciences business.
Ryan MacDonald
Got it. And then a quick clarification on the Sand Box pos.
You mentioned you have about a dozen in place with customers. Is this sort of relatively new strategy where all 12 of these pods were put into place or implemented in the third quarter here or is this something similar that you started out with on the two life sciences customers that already did trend, so to go through the OPT with you guys?
Jason Blessing
Yeah. This was actually post OPT and I think it was probably roughly around Analyst Day when we first started experimenting and having some appetite from customers.
And so I think it falls into those that category of second-half things that we've started to do that make it easier to say yes and begin that journey to the cloud. So it is something it's really been burning kind of building in working its way into our go to market since kind of late winter to early spring.
Ryan MacDonald
Got it. Thanks for the clarification.
Jason Blessing
Thanks Ryan.
Operator
Thank you. We have reached the end of our question-and-answer session.
So I would like to pass the floor back over to Mr. Blessing for any additional concluding comments.
Jason Blessing
Thank you, operator. We had no additional remarks at this time and thank you for everyone -- to everyone for joining the call.
Have a great night.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.