Model N, Inc.

Greetings and welcome to Model N fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Gwen Lauber, Investor Relations. Please go ahead, ma'am.

Good afternoon, and welcome to the earnings call for Model N's fourth quarter and fiscal year 2020, which ended on September 30th, 2020. This is Gwynne Lauber, Model N's Director of Investor Relations, and with me on the call today are Jason Blessing, Model N's Chief Executive Officer, Ruben Gallegos, Vice President of FP&A and IR, and Kathy Lewis, Chief Accounting Officer. Our earnings press release was issued after the close of market and is posted on our website. The primary purpose of today's call is to provide you with information regarding our fourth quarter and fiscal year 2020 performance and our financial outlook for our first quarter and full fiscal year 2021. Commentary made on this call may include forward-looking statements. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10-Q filed with the SEC. In addition, during 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. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics 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.modelin.com to access our fourth quarter of fiscal year 2020 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 fiscal year 2019 results. With that, let me turn the call over to Jason.

Thanks, Gwen, and good afternoon, everyone. Thank you for joining us today. Q4 was another strong quarter for Model N and punctuates a strong end to our fiscal year. I will remember 2020 for all of the challenges we faced around the world, but also because this was a year where Model N continued to deliver profitable growth, strengthen our customer relationships, and take care of our employees. Today, I will provide you with insight into Q4 and our fiscal year 2020 results and give you an update on our business. I will conclude my prepared remarks with an update on fiscal 2021 guidance. Our results for Q4 exceeded all key metrics that we shared in our last quarterly update and demonstrate that Model N continues to execute well in this uncertain environment. Total revenue for the quarter was $41.5 million, an increase of over 13% from last year. And subscription revenue was $29.7 million, an 8% increase over last year. Our strong professional services revenue of $11.8 million highlights that our customers continue to prioritize their Model N projects due to the top and bottom line performance our products enable. Our results also continue to confirm that our focus strategy implemented over two years ago is working, even in these difficult times. Our success this quarter was powered by contributions from all of our go-to-market teams. We added four new logos, we had several expansions in our customer base, and we continue to sign new SaaS transitions. These results show that our teams and customers are settling in to remote selling and delivery. Also of note, when the pandemic started in the spring, we said we would use flexible deal structures to drive sales velocity, and this approach has had the intended positive impact. During Q4, we closed the highest quarterly deal volume in our company's history. The trade-off is these contracts contribute a lower amount of revenue in the near term, but we believe the company benefits significantly by continuing to close deals. This approach keeps our team engaged, shows strong partnership with our customers, and creates upside in our book of business when these contracts renew at more favorable economic terms. Our professional services team had another great quarter and a fantastic year. This team has worked closely with our customers to ensure that projects stayed on track as we worked remotely, which produced strong results not only in the quarter, but throughout the year. The team's ability to complete projects on time and on budget has been remarkable, and this year we celebrated a record number of go-lives, of which more than 90% were delivered on time. Much of the success is a result of our cloud delivery model, which significantly reduces the time to consume new innovation, and our new automation tools, which drastically reduce the time and risk in testing and validation. This continuous improvement to our delivery model further reduces implementation timelines, thereby increasing time to value for our customers. Turning to our markets. We saw success in both life sciences and high tech. Our life sciences team added three new logos, including Arjo, which adds to our growing list of MedTech customers. We were also selected at Organon, Merck's spinoff of their women's health trusted legacy brand and biosimilar businesses. Merck is a longtime Model N customer, and now we will provide Organon with our full suite of Revenue Cloud products. OctoPharma, one of the largest human protein product manufacturers in the world, also joined the Model M family. OctoPharma is a global company committed to patient care and medical innovation and has recently been in the news because of their plasma blood therapies that are being used to combat COVID-19. Given the growth in their business, the company needed a solution that could scale globally while providing commercial and regulatory compliance. After considering several options, the company chose Model N because they believed that we could meet their needs today and support their plans for the future. On our Q2 call earlier this year, we reported that the generics division of Mallinckrodt, a multibillion-dollar global pharmaceutical company, went live on Revenue Cloud in six months, a record at the time. I'm very happy to announce that in Q4, their branded division went live in just five months, a new SaaS transition record for us. This go-live demonstrates not only the high-quality work of our professional services team, but also our commitment to driving rapid time to value for our customers. I am also happy to announce that flu vaccine manufacturer Securus went live in Q4. When we signed this deal earlier this year, I talked about the importance of their Model N project progressing quickly to support their growing business during a busy flu season. Utilizing our new express methodology, our professional services team was able to meet the customer's tight timeline and to get them live in order to meet their business demands this fall. Model N now provides this customer with a fully integrated solution that automates processes and reduces overpayments on rebates and chargebacks. We also had several of our early SaaS transition customers successfully take their seasonal updates this quarter. Gilead took their first update and implemented several new features that give them improved contracting capabilities, enhanced chargeback, improved script validation, and other general improvements. British medical equipment manufacturer Smith & Nephew also took their first seasonal update since their SAS transition and took advantage of several new contracting enhancements as well as improved regulatory compliance capabilities. We also signed new SAS transitions in Q4. Most notably, Johnson & Johnson started their journey to SAS by kicking off a project to move its Model N infrastructure in Japan to our cloud. To achieve their tight timeframe and business objectives, Johnson & Johnson determined that our solutions provided the most accurate reporting and compliance, and that Model N's SaaS platform offered better performance and reliability. As SaaS transition momentum picked up in 2020, we also saw increased interest from our top 10 pharma customers to move to our cloud. We are actively working with several of these customers to plan their move over the next few years. I am personally involved with our account teams in many of these deals as we work collaboratively with our customers to ensure that we find the best path forward to mutual success. Remote work is also proving to be a catalyst for SaaS transition. As customers look for solutions that allow them to adapt to this new normal while enabling their teams to remain productive, competitive, and compliant in a global marketplace. Turning to high-tech, this vertical continues to improve since being impacted in the spring by the global pandemic. In Q4, we added a new logo, executed several customer expansion deals, and celebrated multiple go-lives. The high-tech pipeline does remain below pre-pandemic levels as deals have pushed out, but the pipeline has continued to recover throughout the year. In Q4, we signed Cree as a new customer, as they prepare to spin out their semiconductor business into a new company. Cree is an innovative, leading supplier to multiple market segments, including renewable energy and other growth industries. They determined that Model N is one of three essential projects that they will fund during the spin-out to support the company's new operations. Cree currently relies on partners to manage their complex channel using manual homegrown solutions, which results in significant revenue leakage. We believe that Model N's pricing, quoting, and channel management applications will allow Cree to modernize their infrastructure, reduce revenue leakage, and support their future growth. We also had several successful go-lives in high-tech in the quarter, including an important one at AMD, which expanded to the full suite of Model N products and integrated our solutions with their front and back office systems. AMD is simplifying their sales process and positioning themselves for future growth by improving their data quality and harmonizing processes across business units with Model N. Now I'd like to elaborate on our financial results and provide fiscal year 2021 guidance. Our results for Q4 and fiscal year 2020 exceeded the guidance that we shared with you on our last call and demonstrate our ability to deliver profitable growth. Total revenue for Q4 grew 13% to $41.5 million and subscription revenue grew to $29.7 million an increase of 8% from a year ago. New subscription revenue expanded to over $19 million, an increase of just over 20% from last year. Professional services revenue was $11.8 million. Turning to profitability, non-GAAP gross profit for Q4 was $26.1 million, or 63% of total revenue. Non-GAAP gross margin for subscription revenue was 74%. Non-GAAP operating profit for the quarter was $6.8 million. Non-GAAP net income in Q4 was $5.1 million. We produced a non-GAAP net income per share of 14 cents, which was ahead of our guidance of 7 to 9 cents. Adjusted EBITDA for Q4 was $7 million. representing a margin of 17%. Turning to our full fiscal year 2020 results, total revenue was $161.1 million and subscription revenue was $116.2 million. For the full year, non-GAAP gross margin was 63%. Non-GAAP income from operations for fiscal year 2020 grew to $20.6 million compared to an operating income of $11.8 million in fiscal year 2019. Non-GAAP net income for fiscal year 2020 was $17 million, a significant increase from $8.1 million in the prior year. Non-GAAP net income per share for fiscal year 2020 was 48 cents, up from 24 cents in the prior year. Adjusted EBITDA for the year was $21.4 million compared to a profit of $13.1 million in fiscal year 2019. Moving on to the balance sheet, we ended our fiscal year with $200.5 million of cash and cash equivalent. Our cash balance reflects our healthy free cash flow of $14 million and the successful convertible debt financing completed in Q3. I'd now like to provide you with guidance on our fiscal year 2021. Our initial financial outlook for the year considers several important factors. First, in line with our guidance philosophy over the past couple of years, our outlook is based on a high degree of visibility. It also contemplates our pipeline, which has continued to grow despite the ongoing challenging macro environment. We also expect continued volatility to persist during 2021, which is likely to continue to cause some deal cycles to elongate. Our guidance also factors in the impact of fiscal year 2020 customer-friendly deal structures, which we expect to continue to utilize in 2021. For the first quarter of our fiscal year, we expect total revenue to be in the range of $40.2 to $40.6 million. We expect subscription revenue to be in the range of $29.4 to $29.8 million. Non-GAAP income from operations is expected to be in the range of $4 to $4.4 million, and non-GAAP income per share in the range of 5 to 8 cents, based on a fully diluted share count of approximately 37.5 million shares. Adjusted EBITDA is expected to be in the range of $4.1 to $4.5 million. For the full fiscal year 2021, we expect total revenue in the range of $170 to $172 million. We expect subscription revenue in the range of $122 to $124 million. Turning to profitability, we expect non-GAAP income from operations in the range of $17.6 to $19.6 million and non-GAAP income per share in the range of $0.27 to $0.35, based on a fully diluted share count of approximately 39 million shares. Adjusted EBITDA is expected to be in the range of $18 to $20 million. Before turning the call back to the operator for questions, I want to give you some final thoughts on our initial outlook for 2021. I am very pleased with the progress that we've made since I joined Model N over two years ago and how the team has performed in this truly unique environment. As I said at the start of the call, we have multiple proof points that our strategy is working. We are making progress in both the life sciences and high-tech verticals, adding new logos, and expanding within our customer base. And our professional services team is doing a fantastic job delivering on large projects, including SaaS transition, which drives future growth. I'm very encouraged by the activity that I see and the conversations that I've had with our customers. However, there does remain some uncertainty in the macro environment. That said, we will continue to invest and we will grow through these times, and I continue to be excited about our long-term future. Thank you for joining today's call. Now, I'll turn the call over to the operator for questions. Operator. Operator.