Model N, Inc.

Good afternoon and welcome to Model N's fourth quarter and fiscal year end 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. With that, I would like to turn the call over to Carolyn Bass, Investor Relations.

Good afternoon. Welcome to Model N's fourth quarter and fiscal 2021 year-end earnings call. This is Carolyn Bass, Investor Relations for Model N. With me on the call today are Jason Blessing, Model N's Chief Executive Officer, John Ederer, Chief Financial Officer, and Kathy Lewis, Chief Accounting Officer. Our earnings press release was issued at 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 2021 performance and offer a financial outlook for our first quarter and fiscal year ending September 30, 2022. The 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 non-GAAP metrics to the nearest GAAP metrics are included in the earnings press release issued today which is available on our website. I encourage you to visit our IR website at investor.modeln.com to access our fourth quarter and fiscal year 2021 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 2020 results. And with that, let me turn the call over to Jason. Jason.

Thank you, Carolyn, and welcome to our call today. I am pleased to report that our fourth quarter results beat expectations on total revenue, subscription revenue, and adjusted EBITDA. Our Q4 punctuates the end to a strong 2021 for Model N, and I'm very proud of how our team is executing. Transitioning from an on-premise to a SaaS business model as a public company is not an easy or quick process. But we are in good company with many others who have successfully made the transition, which resulted in stronger, more sustainable business models. As I reflect on 2021, I am pleased with our overall execution and the progress we've made with our growth levers. Part of transitioning to a SaaS business model involves taking care of our customers and moving them forward with us. And last year, we made significant progress on this front. As of the end of 2021, we have transitioned approximately half of our on-premise customers to the cloud. As I have talked about on previous calls, our transition methodology is finely tuned and the cost and time to move customers to the cloud continues to decrease and quality has been excellent. We also still have a significant amount of future incremental ARR associated with moving customers to the cloud in front of us. Many of these remaining deals are with our larger customers, and we expect the impact on our financials to be positive, but potentially lumpy on a quarterly basis. The guidance that John will provide today contemplates closing a portion of these big deals in 2022, but also infuses some conservatism to give us room to work as it can be difficult to predict the precise quarter when these deals will close. Given the success we are having with SaaS transitions, we are also starting to see our maintenance decline at an accelerating rate compared to recent levels. Again, John will provide insight into this when he gives our annual guidance in a moment. In addition to successful SaaS transitions, overall sales velocity continued to accelerate during 2021, due in part to the changes we've made over the last three years to our selling motions, most notably building out dedicated customer and new logo sales teams. In 2021, we closed 34% more total deals versus the prior year, and the number of new logos signed grew by 44% over 2020. I also continue to be pleased with the progress we are making integrating the Deloitte acquisition, which we have rebranded business services. This business significantly expands our total addressable market, enabling us to sell to companies from pre-revenue up to the largest in the world that prefer to buy an integrated software and services revenue management solution. We have already seen our M&A thesis play out with key wins at Main Pharma, Morphosis, and in Q4 with Seracor and an existing customer who has been using Model N in their European division for many years. The latter is a great example of our ability to realize revenue synergies by cross-selling business services into our core Model N customer base. In addition to revenue synergies, we've also improved the overall profitability of this business significantly in the first year. I would also like to call out the continued strong performance of our professional services team, which is delivering strong financial results and high-quality projects. This team had a remarkable 2021 and has built a strong backlog for 2022. I'd like to address one final high-level point before moving on to Q4 highlights. We have heard consistent feedback from investors that they would like more specificity on the progress we are making on our SaaS transition. We recognize that this progress is not always obvious in our quarterly gap results. In addition to the SAS transition progress metrics that I already provided, I would also like to share some additional metrics that we feel illustrate the progress we are making as we reinvent Model N. First, one of the key drivers to our subscription growth has been the fact that Model N provides a high ROI mission critical solution, which results in very strong renewal rates. Our SAS subscription gross retention rates are best in class at above 95%, and during the 12 months ended September 30th, 2021, our net dollar retention rate was 118%. We expect software subscription gross retention to continue to be 95% plus and net dollar retention to be in excess of 110%. These retention numbers show that we are building a durable SaaS business. And finally, today we are introducing more specificity on the growth of our SaaS business, something that has been difficult for investors to understand given the other components included in our recurring subscription revenue line, such as maintenance and term licenses. For 2022, we are targeting to exit the year with SaaS revenue growing at 20%, and we expect this to accelerate in 2023 due to the progress we are making on our key growth levers. I hope this additional commentary helps investors better understand the progress we are making as we reinvent Model N. Next, I'd like to give you an update on our recently completed quarter. Success in Q4 was driven by a healthy contribution from all growth levers. We signed multiple new logos, two SaaS transitions, numerous customer base expansions, and we also enjoyed strong renewals across the board. And similar to last quarter, we closed a healthy amount of deals with solid contributions from both life sciences and high tech. Turning to SaaS transitions, during the quarter, we signed EMD Serrano and Alkermes. EMD Serrano is a terrific case study of why customers are moving to our cloud. This customer was running an older version of our software and was concerned about the risk associated with having a mission-critical product on an aging on-premise infrastructure. ModelN's Revenue Cloud will ensure that EMD is always current and has access to our latest innovation to address the dynamic regulations that are a reality in life sciences. In recent quarters, we've talked about a strong pipeline and an increase in sales activity. And it's encouraging this quarter to see that trend continue and result in a high number of closed deals. As I mentioned earlier, we are seeing nice synergies as we've integrated the acquired Deloitte Business Services Group into our sales and delivery teams. As we've said previously, the addition of this offering opens up our TAM by helping us to land new logos, as well as expand our relationships with existing customers. A great example of this is the customer that I mentioned earlier that has been using Model N in Europe for many years and will now subscribe to business services to support their U.S. operations. Also during the quarter, Fresenius Kabi, a global top 25 pharma and medtech company, successfully completed a SaaS transition to support their U.S. operations. This project is significant because the customer retired several legacy on-premise customizations adopted new Model N functionality and reduced their overall costs. After moving to the cloud and taking advantage of our elastic compute capabilities, the customer is reporting that certain processes that took 15 hours to complete are now taking minutes. I recently heard from Fresenius' executive sponsor, and he couldn't be happier with the implementation and the value that Model N's cloud solutions are delivering to his team. Turning to high tech, we continue to see improved traction in this part of the business. During the quarter, our sales team signed two new logos, including Cricut and Ergotron. Cricut is a $1 billion global manufacturer of computer-controlled cutting machines and scanners for the consumer market. Cricut is starting their model and journey by implementing channel data management in their international divisions. One of the key decision makers at Cricut is a prior Model N customer, and based on his favorable experience with us, he selected us again. We always love to see repeat customers. We also continue to see our land and expand strategy pay dividends. During the quarter, we had numerous upsells within our high-tech business, including AMD, Micron, Seagate, and Targus. Targus is a terrific example of how our land and expand sales motion sets us up for additional expansion opportunities in the future. Our initial deal with Targus closed in Q2 2021. They went live in early Q3 and expanded their use of channel data management in Q4. Customer case studies like Targus showcase the new Model N and the rapid time to value that our customers see from our products. Turning to professional services, our team had another great quarter to cap off a fantastic year. In Q4, we had several successful go-lives, including key projects at Regeneron, Securus, Western Digital, and Crestron. We also had one of the world's largest medtech companies, which we announced as a new logo in Q2 2021, go live on our global tender management product in Europe. Our services team continues to deliver on time, on budget, and at best-in-class margins. As I mentioned earlier, I also expect strength to continue in our services business as the team has built a substantial backlog as we head into 2022. Turning to product, our team continues to deliver, and I would like to highlight an important new product that we are working on closely with a group of our largest life sciences customers. Specifically, we are in the final stages of rolling out a new state drug pricing transparency management solution. In the last few years, over 20 states, and this list is growing, have enacted new drug price transparency laws that are starting to take effect. These laws require manufacturers to report information about any new drug launch or price changes along with the justification for the change. Due to the complexity of the requirements by each state, drug manufacturers are looking for efficient ways to manage this process and stay compliant. Given our trusted advisor status and deep domain expertise, Model N is a natural partner to work with our customers to simplify this complexity. To address the need, we have developed a new solution that we feel will help our customers navigate this new legislation and help them to remain compliant. And finally, we are excited that IDC recognized our high-tech product suite in their recently published MarketScape. Specifically, IDC named Model N as a worldwide leader in price optimization and management applications in their 2021 vendor assessment. According to the IDC MarketScope, Model N provides users with granular control of pricing for high-tech use cases along with strong channel management capabilities for things such as market development funds, rebates, win probability, and other incentives. Customers highly rated Model N and described our products as being built for their future due to Model N's comprehensive high-tech industry-specific features. We are very proud of our high-tech solutions and how we fared during the rigorous evaluation from IDC. I also love the customer recognition and the quote that Model N is, built for their future. This outside praise is the ultimate endorsement of the value we provide to our customers. I'd like to close by saying that I'm pleased with our execution in 2021 and that I am excited about the year ahead. Our maniacal focus on our growth levers of SaaS transitions, customer expansions, and new logos is paying off. And as I noted earlier, we still have significant runway in all of our growth levers, which makes me optimistic about the road ahead. I'd now like to turn the call over to John to discuss our Q4 financial results and provide an update on our guidance. John?