Nov 9, 2015
Executives
Sheila Ennis - Investor Relations Zack Rinat - Chairman, Chief Executive Officer Mark Tisdel - Chief Financial Officer, Senior Vice President
Analysts
Nandan Amladi - Deutsche Bank Brian Peterson - Raymond James Tom Roderick - Stifel Sterling Auty - JPMorgan
Operator
Greetings and welcome to the Model N, Fourth 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 would now like to turn the conference over to your host, Sheila Ennis, you may begin.
Sheila Ennis
Good afternoon and welcome to the earnings call for Model N’s fourth quarter and fiscal 2015 which ended on September 30, 2015. With me today are Zack Rinat, Chairman and Chief Executive Officer; and Chief Financial Officer, Mark Tisdel.
Our press release was issued after the close of market and is posted on our website where this call is being simultaneously webcast. The primary purpose of today’s call is to provide you with information regarding our fourth quarter and our full fiscal year 2015 performance, in addition to our financial outlook for the first quarter and full fiscal year 2016.
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, 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 our quarterly results.
Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investor.modeln.com to access our fourth quarter and full fiscal year 2015 press release, periodic SEC reports, and the webcast replay of this call.
Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal year 2014 which ended on September 30, 2014. With that, let me turn the call over to Zack.
Zack Rinat
Good afternoon and thank you for joining us today. I will start the call today with a summary of Q4 fiscal year 2015 and fiscal year 2015 as a whole and then present our strategy to fiscal year 2016 and beyond.
Model N executed well in Q4 2015, exceeding our guidance on both the topline and bottom line. Mark Tisdel, our CFO will follow me with the financial datas.
We made excellent progress on executing our strategy to concurrently grow our revenue and to transform our business to SaaS and recurring revenue. Model N grew fourth quarter total revenue 25% and SaaS and maintenance revenue 37%, versus Q4 fiscal year 2014 reported 67% of our total revenue as SaaS and maintenance revenue.
Q4 marked the end of a strong year. Model N grew both sequentially and year-over-year in every quarter of the fiscal year.
The results of the last quarter and the last year are early strong indicators that our vision and strategy are right on the mark. This last year, we accelerated the transition of Model N into a cloud company and such we transformed every aspect of our business.
First, we changed the way we engage with our customers. We branded these efforts as the Rainmaker XUP.
Rainmaker XUP is the programmatic approach for connecting, communicating and engaging with our customers. Rainmaker X is our executive sponsor group.
Rainmaker U is our collective global user groups and Rainmaker P is our product group. In fiscal year 2015, we held 10 Rainmaker XUP meetings with our customers.
We received strong positive response from our customers citing better engagement with Model N. Second, we transformed the way we develop and deliver products, as well as the way our customers consume these products.
Last year, we announced revenue management as a service, which is a strategy and solution to move our install base from the current on-premise deployment to SaaS. In addition, we released three seasonal releases of revenue management cloud, including [Channel 15], which was released in Q4 fiscal year 2015.
An example of the transformation in Q4 was the extension of our relationship with the Intel Internet of Things or IOT Group. Intel is leveraging Model N to build a sophisticated and agile revenue management platform to help scale their business.
Our Revenue Enterprise Cloud will enable the IOT Group to price and quote based on a bundle of silicon, software and services, while managing incentive such as rebates and market developments fund. In addition, our Revenue Intelligence Cloud will enable Intel to analyze and optimize the revenues via sophisticated analytics.
Third, we released several new cloud applications. We released Revvy Sales, the first CRM solution for the semiconductors and components industry.
Revvy Sales combines the best of both world, Salesforce Sales Cloud and Model N deep vertical expertise to deliver a vertically focused solution for CRM in one that is fully integrated with our Revenue Management Cloud. We made good progress in fiscal year 2015 signing companies such as Atmail and in Q4 we signed MA-COM Technology Solution, a developer of radio, microwave and millimeter wave semiconductor devices and components.
MA-COM is based in lower Massachusetts with annual revenues of $420 million. They will leverage both Revvy sales and Revenue Management Cloud Suite for high-tech, including deal management, deal analytics and channel management.
Revvy sales and Revenue Management Cloud will enable them to replace the current system in manual disjointed spreadsheet-based quoting pricing and commissions processes with an end-to-end unified enterprise grade CRM and revenue management process and platform. In Q4, we announced Revvy Revenue Management to reinforce the first salesforce native enterprise-grade Revenue Management Application Suite.
Revvy Revenue Management is comprised of five applications, Revvy Configural Price and Quote or Revvy CPQ, Revvy Global Price Management or Revvy GPM, Revvy Compact Lifecycle Management or Revvy CLM, Revvy Rebate and Revvy Intelligence. Revvy Revenue Management embodies 16 years of experience working with some of the most innovative global enterprises to develop, deploy and scale enterprise grade revenue management.
Furthermore, Revvy Revenue Management is an outcome of an intense four years of architecting revenue management to be both Salesforce negative and enterprise grade. In the last quarter, we signed several customers that will be using Revvy Revenue Management application.
A top three pharmaceutical company selected Revvy GPM. They selected Revvy GPM for an enterprise-wide global deployment across all the divisions, which includes pharma, generic, and medical device.
Revvy GPM will provide a single source of the throughs for global prices, pricing intelligence, launch sequencing optimization and international reference pricing. Corning Life Sciences and Nitto Denko among others signed agreements for Revvy CPQ.
Revvy CPQ is the linchpin of Revvy Revenue Management. Revvy CPQ enables sales people to maximize the revenues and minimize non-productive time, which is particularly big challenge for those that sell complex configural product.
Revvy CPQ leverages and exposes core elements of products from ERP systems providing native into interoperability with SAP. Revvy CPQ was designed with performance in mind using a technology that was proven to deliver lightning fast response for the most complex and demanding configuration and role combination.
Finally, we’re excited to announce the acquisition of Channelinsight, a leader in Channel Data Management or CDM. Channelinsight enables Model N to accelerate our strategy for end-to-end revenue management application suite.
The combination of Model N Channel Management and Channelinsight’s CDM provides companies with a leading enterprise grade end-to-end solution to manage the global channel revenues. We are excited to have the Channelinsight customers and employees join the Model N family.
In summary, fiscal year 2015 gave strong positive indicators to the vision, strategy, and execution of Model N. We are excited about the market opportunity for revenue management in fiscal year 2016 and beyond.
We believe in our strategy to capitalize on this opportunity as we find our self in a very exciting time in our journey to enable global businesses to leverage revenue management as a competitive advantage. We are in an era of major technological change with the emergence of cloud computing, SaaS, social, mobile, and Big Data to name a few.
These technologies create both challenges and opportunities for businesses and in particular for the way companies are connecting, interacting, and engaging with their customers. At the same time, enterprises are focused on creating shareholder value by delivering financial results that are centered on top line revenue growth.
These two trends are converging quickly as revenue management becomes a catalyst to transform customer relationship into improved financial results by enabling enterprise to maximize revenues and revenue growth. Thought leaders believe that the most impactful way to achieve competitive advantage and to rejuvenate the business model is to focus on revenue growth.
We believe that the first stage for businesses will be about unification of CRM and revenue management or RM. The outward facing suite that enable digital transformation, including mobile, social, e-commerce, and multi-channel sales.
This is not just about integrating CRM and revenue management, but much more bolder concept of unification. In this stage, enterprise will unify internal data from CRM, RM, and ELP, as well as channel and external market data in order to create a multiplier effect that is in order of magnitude greater than the sum of the past.
As CRM and revenue management are unified, we see ELP still playing a major role as the core internal system of record for traditional financial process, orders and core manufacturing. And this is likely to be the IT landscape for some years to come.
We see strong demands for revenue management in our core verticals and with the broader manufacturing industry. As an example, we now have 9 of the top 20 pharmaceutical companies leveraging Revvy GPM to manage their global prices.
Our strategy in fiscal year 2016 is to invest to continue our leadership position in life sciences in high-tech, capitalize on the unification of CRM and RM, while completing the transformation of the company to SaaS and recurring revenue. We are aligning the internal incentives with annual recurring revenue or ARR and our internal management metrics stays with SaaS.
I’m encouraged by the result of fiscal year 2016 and I’m excited about fiscal year 2016 and beyond. Let me turn the call over to Mark to discuss our financial results and guidance for fiscal year 2016.
Mark?
Mark Tisdel
Thank you, Zack. In fiscal year 2015, Model N accelerated the transition of our business model in SaaS and maintenance revenue.
Our revenues are split into two lines on our income statement. Line 1 is license and implementation revenue.
We conclude the perpetual license and the services that are associated with implementing these licenses. Line 2 is SaaS and maintenance revenue, which includes maintenance and support related to the perpetual licenses.
In fiscal year 2015, we had approximately 61% of our total revenue or roughly $58 million recorded in line 2 as SaaS and maintenance. This represented growth of over 24% over fiscal year 2014.
The remaining 39% of our total revenue or roughly $36 million was recorded in line 1 as license and implementation grew 2% over fiscal year 2014. The trend towards SaaS and maintenance revenues accelerated throughout the fiscal year.
As Zack mentioned, in Q4 of fiscal year 2015 67% of our total revenues were in line 2 SaaS and maintenance. We are accelerating the transition of our business model into recurring revenues into fiscal year 2016 and beyond.
We believe in this strategy for the following reasons. First, there is wide acceptance of SaaS as preferred consumption model even in the highly regulated industries such as life sciences.
The fact that nine of the top 20 pharmaceutical companies are managing their global prices on Revvy GPM, which is our SaaS Solution based on the Salesforce platform is a strong testament to the wide adoption of SaaS. Second, our entire product line is offered as SaaS and we enable our customers to move from on-premise to revenue management as a service.
In addition, all of our new products such as Revvy revenue management and Revvy sales have been developed only on the sash platform and are offered only at SaaS. Third, we had noticed a significantly higher customer satisfaction where customers were using SaaS solution.
This customer satisfaction has been demonstrated in our annual customer satisfaction survey and in our renewal rates, which have exceeded 95% over the last few years. Our guidance for fiscal year 2016 is to increase our line 2 SaaS and maintenance revenues to approximately 80% of total revenue or $85 million $86 million.
This would represent a 47% to 48% year-over-year increase of SaaS and maintenance revenues. Our guidance for line 1, license and implementation is approximately 20% of total revenue or $21 million to $22 million.
This is a 39% to 42% year-over-year decrease of license and implementation revenue. The decline in license and implementation revenues in fiscal year 2016 is driven by the fact that in fiscal 2015, we successfully completed a number of significant multi-year license and implementation projects.
Upon project completion, we recognised revenue that has been deferred. In fiscal year 2015, we recognised approximately $7 million of deferred revenue related to project completion.
The shift in our business model will have short term impact on the timing of revenue recognised and therefore profitability as we continue to transition the business. For fiscal year 2016, we estimate that we will recognise less than 700,000 of deferred revenue related to project completion.
As the majority of the $7 million of deferred revenues recognised in fiscal year 2015 drops to the bottom line, the EPS impact was a positive $0.27 per share based on an average share count of 26 million shares. With the acceleration of SaaS based revenue, with the acceleration to the SaaS based recurring revenue model we will no longer have this revenue related to project completion activity.
As we exit fiscal year 2015, we believe the company is on the right path to establish our state of goal of returning to historic growth rate, increasing percentage of recurring revenue, and driving the company towards long-term profitability. We will share further details on the long-term business model at our Analyst Day tomorrow.
As the migration to recurring revenue continues, we are including two additional annual metrics in our guidance. The first metric we are sharing is SaaS annual recurring revenue or ARR.
We feel this metrics demonstrates strong progress we made towards our financial goal. The second metric is revenue coverage, which we feel the helpful metric in demonstrating the bookings to revenue conversion in our business model.
As mentioned, we will give guidance on these two metrics annually. Moving on, let me now outline our initial guidance for fiscal year 2016 and for the first quarter.
For fiscal year 2015, we expect total revenues to range from $106 million to $107 million. This includes approximately $7 million of revenue from Channelinsight.
This represents 13% to 14% year-over-year growth. The ARR is expected to range from $34 million to $35 million, an increase of 75% to 80% over fiscal year 2015.
The revenue coverage for fiscal year 2016 is approximately 75%. This includes deferred revenue plus booked, but not invoiced revenue we expect to recognize in fiscal year 2016, the total of which we call as backlog.
Non-GAAP loss from operations in a range of $17.8 million to $17.3 million, non-GAAP net loss per share in the range of $0.66 to $0.64 based on a weighted average share count of 27.1 million share. We expect our ending cash balance at September 30, 2016 to be between $70 million to $72 million.
This includes cash utilised in the acquisition of Channelinsight, which are closed in the first quarter of fiscal 2016. For the first quarter ending December 31, we expect total revenues to range from $24 million to $24.2 million.
We expect roughly 77% of our Q1 revenues to be SaaS and maintenance. Non-GAAP loss from operations is expected to be in the range of $4.8 million to $4.6 million.
This would lead to a non-GAAP net loss per share in the range of $0.18 to $0.17 based on the weighted average share count of 26.8 million shares. Now, let us walk through the financial results of Q4 2015 and fiscal year 2015 as a whole.
Total revenue for the fourth quarter was $25.4 million above our guidance range of $24.6 million to $24.9 million and representing growth of 25%, compared to $20.3 million in Q4 of fiscal 2014. Within total revenue license and implementation revenues were $8.4 million and SaaS and maintenance revenues were $17 million for the quarter.
The mix of revenue in Q4 was 67% SaaS and maintenance, versus 33% license and implementation, an improvement from 61% SaaS and maintenance, versus 39% license and implementation in Q4 of 2014. The transition to SaaS and maintenance model has continued to progress strongly and this quarter represents the highest percentage of SaaS and maintenance revenue in company history for the second consecutive quarter.
SaaS and maintenance revenue in Q4 fiscal year 2015 have grown over 37% from Q4 of fiscal 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 profits for the fourth quarter were $14.3 million, compared to $11.8 million in the fourth quarter of 2014.
Similar to recent quarter’s gross profit in this quarter included the impact of roughly $600,000 from the amortisation of capitalised software that began upon the launch of our Revvy CPQ product. Overall gross margin in the quarter was 56%, compared to 58% in Q4 of last year.
As we stated in the past, quarter-to-quarter variability gross margin is to be expected depending on the mix of revenue and other factors. Research and development expense was $4.3 million, compared to $4 million in Q4 of fiscal year 2014.
We are investing to further expand the breadth and depth of our product and in particular the Revvy products offering. We have capitalised approximately $700,000 in related expenses this quarter.
Sales and marketing expenses was $7.1 million, compared to $6.8 million in the prior year's comparable period. This increase was driven by our continued investment in sales and marketing as we look to expand our sales coverage and continue to increase our sales pipeline.
Q4 G&A expense was $4.6 million, compared to $4.1 million in Q4 of fiscal 2014. Operating loss for the period was $1.7 million, compared to a loss of $3.1 million in the fourth quarter of last year better than our guidance of an operating loss of $2.1 million to $2.3 million.
Net loss in the fourth quarter was $1.8 million, compared to a net loss of $3.3 million in the fourth quarter of fiscal 2014. This produced a net loss per share of $0.07 based on the share count of 26.5 million shares, an improvement from a net loss per share of $0.13 in Q4 of last year, which was based on the share count of 24.9 million shares.
This was better than our guidance of a net loss of $0.08 to $0.09 per share. Adjusted a bit of for the quarter EBITDA for the quarter was a negative 700,000 compared to a negative $2.3 million in the year ago period.
We ended the fourth quarter with $91 million of cash and cash equivalent down from $93.8 million at the end of the third quarter of fiscal 2015. Again, please note the Channelinsight transaction closed in early Q1 of 2016.
At the end of the fourth quarter, our accounts receivable balance was $16.1 million and our total deferred revenue was $24 million. As we stated previously, we do not believe our accounts receivable and deferred revenue balance are meaningful indicators of the business activity during any particular quarter, as the timing of invoicing under the contracts impacts these items as we do not bill our customers up front for total contract fees.
For the fourth quarter, net cash used in operations was $2.9 million, which after adding cash tax of $300,000 and $700,000 of capitalised software produced a free cash flow of negative $3.9 million. This compares to cash flow used in operations of $2.6 million in the fourth quarter of last year, which after adding $300,000 of CapeEx and $400,000 of capitalised software amounts to a free cash flow of a negative $3.3 million.
Similar to 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 under our contracts. Our focus over the last year has been on revenue growth and the quality of revenue or percentage of recurring revenue.
We believe that we have made great progress in both areas. We will continue to focus on these goals in fiscal year 2016.
We’re also very conscious to ensuring we optimise cash utilisation to drive value into the business. We will provide additional insight into our strategy, progress, and outlook tomorrow at the Analyst and Investor Day.
We will now open the floor for your questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
[Operator Instructions] Our first question comes from Nandan Amladi with Deutsche Bank. Please proceed.
Nandan Amladi
Hi good afternoon and thanks for taking my question. Zack, Channelinsight acquisition that you made, can you talk about what drove the decision and also what sort of revenue model we will see from that segment of the business?
Zack Rinat
Sure, Nandan. We look at our vision of end-to-end revenue management solution and when you look at the component of end-to-end revenue management you need to have the ability to manage your direct revenues and your channel revenues.
So, managing channel revenues is absolutely paramount as companies are leveraging channels in a way to grow the business. And when you look at the component of a channel, a management solution is the combination of the transaction, the coating, the contracting, and all of the above, but also the ability actually to bring actually data from the channel.
Just to give an indication, Channel Data Management was the number one, actually requested by our customers to the Model N suite. And that is where looked around and found Channelinsight and we believe that Channelinsight is the great complementary to Model N.
We conducted a very detailed due diligence, including of a very detailed customer satisfaction among with their customers, and really like what we say. In addition to that we really believe that as we move for forward the ability really to take data, and turn data into information, turn information into insight, turn the insight into external, and into revenue is going to be paramount and you look at the vision that we have for the way that we are driving right now and our customers surviving right now actionable insight, channel data and having a clean channel data is absolutely critical.
So, our strategy is really to go and to provide a single solution in our channel management that is going to include the end-to-end solution and the data as part of the end-to-end Revenue Management Suite. And the last thing that I want to talk is about the business model, so the business model is all centered around recurring revenues and also something that we really like a lot.
Nandan Amladi
Is there any integration work involved or were you already working with this company?
Zack Rinat
We are working with the company. We announced the acquisition a couple of weeks ago and we already closed it.
So, all their employees are now a Model N employees and we can offer these immediately as a solution to our customers. Just to give you an indication, we have customers that are using already a bolstered solution both in high-tech and in life sciences.
For example, Intel is using both solutions and then Corning Life Sciences in the medical device is also using both the solution. So, for us, it’s more of a solution that we can immediately go to market with.
Nandan Amladi
Thank you.
Operator
Thank you. Our next question comes from Terry Tillman with Raymond James, please proceed.
Brian Peterson
Hi, this is Brian Peterson in for Terry. Just wanted to hear on the guidance a little bit and understand the Channelinsight contribution, I know you gave the revenue number, but any help on what kind of margins that business had and maybe how quickly was it growing and Mark, I know you gave the cash balance for the end of the year, but what was the price actually paid for the acquisition?
Mark Tisdel
So, Brian we have not disclosed the price that we have paid for Channelinsight as far as gross margins and as far as bottom line contribution, they run a very tight ship for very long time period at the company. They’ve done a great job managing their costs.
So, you look at the business that has to run on a short amount of cash, they’ve done a great job doing that. They’ve also done a great job building up their gross margin as well in their business.
So, it’s something as Zack indicated we’ll be able to integrate into the business model very quickly and then it will be definitely be accretive to us in the long run.
Brian Peterson
Okay. Fair enough, and then on the first quarter guidance, I’m assuming the decline is mostly related to the license and implementation sales, just can’t understand the timing of that.
Is that decline going to be anyway related to any particular quarter, just try to help us out there in the model.
Mark Tisdel
Sure. So, you are correct, it is transition of the business model from line 1, which is our license and implementation to the line 2 model.
The farther away you move from Q4 the less the license and implementation revenue will be as a percentage of revenue. We do have some license implementation projects going on that we’ll be recognizing throughout the full-year 2016.
Brian Peterson
Okay and last one from me, there’s been a lot of M&A in the semiconductor sector with some of your customers definitely involved in that, any help on understanding what that does to sales cycles what you’ve historically seen when there is M&A involved for customers in that space, thanks.
Zack Rinat
So, we see M&A activities in both of our markets, both in life sciences, in semiconductors and we see both industries is accelerating actually the strength or the M&A. When you look at this, it has in theory two effects.
I mean the one obvious one is that we have less targets in the industry and at the same time this is really something that pushes companies to really to look at the business processes, their system and really ability to scale the business to the next level. A furthermore when we talk right now with our customers they like the notion of optionality, which is really the ability to have a flexible revenue management platform that is going to enable them to integrate, but frankly also to divest some of their business.
In general, M&A has been good to Model N in both industries. If you look at anything from the merger between Merck and Schering-Plough both of them were on different revenue management systems and then they leverage Model N as a platform for integration.
If you look at the way that ON Semiconductors have been using Model N over the years as a way to integrate their another acquisition it has been very good to Model N, but it doesn’t mean that we are always going to be on the winning side in M&A activities, but so far it has been very good to us.
Brian Peterson
Thanks Zack.
Operator
[Operator Instructions] Our next question comes from Tom Roderick with Stifel, please proceed.
Tom Roderick
Hey guys, good afternoon, thanks for taking my question. Mark, wanted to just understand the impact of the move towards greater recurring in SaaS revenue here, particularly as it impacts the gross margin.
So, understand where this is sort of impacting the topline, how should we think about what the gross margin looks like for your business next year. Is it pretty fair to think about it in the same vein as where it is at right now, should we model lower, higher just any guidance you can provide and that would be great.
Mark Tisdel
Sure Tom, so thank you for the question. We would expect to, as you model it out there as we talked about before, there is some variability from quarter-to-quarter into our gross margin and we do expect to see that as we move through fiscal year 2016.
We expect to continue to improve our gross margins overall as we move and enter 2016 to become a higher percentage of line 2 revenues, but as you know the line 1 revenue is a mix between license and services and because we’ll have less as we go through time less license revenue running through that line, you would expect to see the line 1 gross margin decrease towards the services gross margin number.
Tom Roderick
Okay. Okay.
Zack Rinat
Tom, just a note from me. From a colorful or from a strategic point of view when you look at the new emerging business that is going very nicely for us with SaaS and recurring revenues and other impact of this is that we are doing more and more work actually with system integrators from the get-go and I feel that this is also going to be a good positive impact to gross margins, not in the short-term, but over time as we scale the business.
Tom Roderick
Got it. So, there’s a little push and pull on the gross margin line, but it doesn’t sound like you’re encouraging us to model that dramatically down relative towards that right now.
Mark Tisdel
Right, we’re going to give further color on that tomorrow.
Zack Rinat
Yeah.
Tom Roderick
Okay.
Zack Rinat
You are right.
Mark Tisdel
Yeah.
Tom Roderick
Okay. Great, the Channelinsight model I understood what you just said regarding it being predominantly a recurring revenue model, is there much subscription revenue in that or term license revenue in that or is that predominantly maintenance that will move into the mix on that front?
Zack Rinat
Tom, the way that I will encourage you to think about this product, as well as all of our product right now think about it as basically as a subscription as a SaaS subscription business, which is we basically are going to the market right now to sell basically channel management as a SaaS subscription and that’s what we deliver this to our customers.
Tom Roderick
Got it, okay. One last follow on, so I’m just playing with the numbers on the operating expense side a little bit here and so I get that my assumption might be off, but if I were to just sort of model down to flat gross margin, I’m going to end up to get to your guidance on the operating income side, probably around $80 million or so give or take a little bit for non-GAAP operating expenses for next year.
So that’s almost $20 million increase from this year where last year was up $5 million, $6 million so it sounds like you’re projecting a pretty big increase in headcount and operating expense type of items, where should we expect to see those items show up? Is this a big sales force build, is it a big R&D build, is it new global regions you’re trying to reach, just what kind of guidance can you give us as to where that Opex will be spent?
Mark Tisdel
Sure, Tom. We’re going to actually go in a bit detail on this tomorrow, so there’s three areas.
One is on the non-cash side of the house, we capitalize over $2 million of software in fiscal year 2015 where that number will be significantly less in fiscal year 2015, so obviously no cash impact to the business. It’s just an impact to net operating loss.
So, we’ll go through that tomorrow. From an investment perspective, yes, we continue to invest in to the sales and marketing organization.
Zack talked a lot about the insight we have into opportunities and the ability to pursue those opportunities and ability to create pipeline, especially around the Revvy product areas. So, we will continue to invest in the sales force organization to drive towards facilitating our product need as we move ahead, but we will give some more color and insight on tomorrow on the call or on the meeting.
Tom Roderick
Great, looking forward to it. Thank you.
Operator
Thank you. Our next question comes from Sterling Auty with JPMorgan.
Please proceed.
Sterling Auty
Yes, thanks, hi guys.
Mark Tisdel
Hey.
Sterling Auty
So, let’s start with, I like that you gave us a percentage of SaaS and maintenance for this coming year, but how should we think longer term based on some of the commentary, are you no longer going to offer this under the license and implementation model, so will this move over to a 100% SaaS over the next two or three years?
Zack Rinat
We really believe that this is the case. Starting from a strategy point of view we need to provide our customers with choices.
With the current solutions, we only offer our product as the SaaS solution, but we have an installed base and until the install base is fully moved to revenue management as a service and to SaaS in case that they need to either their customer delivery from a product or services that [indiscernible] with this, we need to support them in this transition and we needed to be sensitive to them. So the way that you can think about it is that all our new business even in the previous year was actually SaaS and recurring revenues, but it’s going to take some time until we are going to move the installed base to revenue management as a service.
Sterling Auty
Okay. And then can you give us a sense of what the renewal rates were like in the maintenance and in the SaaS components of line two?
Mark Tisdel
Yes, sure. So, I think we talked about on the call today Sterling that we’ve seen rates above 95% for the subscription SaaS side of the business and we took the historic rate for the maintenance support has varied between 95% and a 100% over the company history.
So, rates of our customer renewals have been very strong especially over the last six or seven years.
Sterling Auty
Should we think about obviously we’re not only going to model fiscal 2016, but as we’re thinking about the trend, how should we think about maybe those renewal rates declining as you see more of your installed base may be starting to shift to SaaS even more than what you’ve seen in the last couple of years?
Zack Rinat
No, I would look at this as a bundle frankly Sterling and I would look at basically revenue management as a service as an add-on to support and maintenance as a recurring revenue and over time they are going to be combined potentially into a single line, it’s just a matter of packaging not of actual value and delivery.
Sterling Auty
Okay. So, we shouldn’t actually try to may be split out the maintenance fees because that was going to be the next question, how much of it at this point is maintenance and how much is SaaS you’re saying just continue to look at as one bucket?
Zack Rinat
Yes, the way that I think about this is, as we move the transition I would look at all of this business as basically recurring revenues and again, from how we package this over time we will obviously bundle this, but not in the short-term. So, I would look at this as a continuous recurring revenue.
Sterling Auty
Okay. And when you talk about the ARR metric that you actually gave guidance to for fiscal 2016 just so that that I’m clear so the $34 million to $35 million, is that ARR in the fourth quarter, so in other words the annualized value of the contracts enforced in the fourth quarter annualized and that’s what you’re calling ARR or how is that metric defined?
Mark Tisdel
That would be the aggregate revenue for fiscal year 2016 that would be associated with the SaaS subscription line. So, it’s only the subscription line of the SaaS that would be associated with that figure, it is not the exit MRR times 12, it is the aggregate of the ARR as we move through the year.
Sterling Auty
With just for SaaS?
Mark Tisdel
Just for the SaaS, just for subscription portion yes.
Zack Rinat
Yes.
Sterling Auty
Okay. So, I guess I’m a little confused, so is that basically given me what I was just asking which is okay, within SaaS or maintenance you’re basically telling us that the SaaS component is 34 to 35 for the full year.
Mark Tisdel
That’s correct.
Sterling Auty
Okay. And last question, can you give us a sense of what the quarter carrying sales headcount looked like at the end of the year, at the end of the fiscal year here versus last year?
Zack Rinat
Yes, so Sterling, we do not disclose the number of sales people. The only thing that we know we can say that we are right now at peak of the number of sales people in the another company and I think furthermore we have scaled the sales organization throughout the year and when we started the year we had basically all the sales people that we need to make not to plan and that’s been our strategy for a long period of time that the people that we hire in the year are basically to create an outcome for the year after that as a planning assumption.
Obviously, we’d like to do better than that, but we have right now, we scaled from the sales organization across vertical, across geographies, across product line and we’re still making an investment and let’s hope it is going to yield results for thereafter there, but we don’t plan on additional sales people to make the plan that we just discussed.
Sterling Auty
Right, thank you.
Operator
There are no further questions. I would like to turn the floor back over to Zack Rinat for closing comments.
Zack Rinat
With that let me just wrap up by saying that we look forward to sharing further details about our strategy, progress and outlook at the Analyst and Investor Day tomorrow in San Francisco. For those of you that are unable to make it in person we’re going to webcast it, so you could look at details at the IR portion of the website.
It’s been a strong year for Model N and we’re looking forward to capitalize on the acceleration of revenue management and transformation of the business model in next fiscal year and we look forward to working with all of you, thank you very much.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.