Model N, Inc.

Good afternoon and welcome to Model N's third quarter of fiscal 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. With that, I would like to turn the call over to Carolyn Bass of Investor Relations. Please proceed.

Good afternoon. Welcome to Model N's third quarter of fiscal 2023 earnings call. This is Carolyn Bass, Investor Relations for Model N. With me today on the call are Jason Blessing, Model N's Chief Executive Officer, and John Ederer, Chief Financial 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 third quarter performance and to offer a financial outlook for our fourth quarter and fiscal year ending September 30, 2023. The commentary made in 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, 10Q, 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.modelm.com in order to access our third quarter fiscal 2023 press release, periodic SEC reports, and the financial replay of this call. Finally, unless otherwise stated, all financial comparisons in this call will be to our fiscal year 2022 results. And with that, let me turn the call over to Jason.

Thank you, Carolyn, and welcome to our call today. I am pleased to report that our third quarter results beat expectations across the board. We exceeded guidance for total revenue, subscription revenue, and professional services revenue. We also posted record-adjusted EBITDA as we continue to drive efficiencies related to our business model transition. Overall, Q3 was another strong quarter and underscores our commitment to driving profitable growth. Our Q3 SaaS metrics were also strong, driven by SaaS ARR, which grew by 28% year over year. In addition, our SaaS net dollar retention was 126%, up three points from Q3 of last year. I am very proud of our team and the business model transformation that we are driving, especially in an uncertain macroeconomic environment. Before talking about the quarter, I'd like to give an update on two topics that I know are very important to our investors, and that's our view on the macro and our business model transition. As I shared on our last call, during Q2, we saw some customers applying more scrutiny to incremental spend, and in some cases, additional approvals were required to get deals done. We saw this impact continue in our fiscal Q3, but I would say that our selling environment is stabilizing and did not deteriorate further. Next, we are very close to completing our business model transition and have seen significant momentum over the last year, kicking off projects to move customers to the cloud. We are also starting to see increased leverage in OPEX, as is evident by our favorable EBITDA trends. As we get to the end of the transition, we are seeing some deal timing issues as we work with customers to create mutually beneficial economics. We do still believe that substantially all of these customers will convert over the next couple of quarters, but we are taking a conservative stance looking forward to next year to give ourselves room to work with this final cohort of customers. John will discuss this further in his prepared remarks. Despite some of the short-term deal timing issues, I am still very excited about Model N's future. We had a great user conference in June, which we call Rainmaker, where we saw very strong engagement with our customers. In fact, this annual event resulted in a substantial amount of new pipeline, particularly on the new logo side. There was also a lot of interest in our new products and the vision that we laid out for the company, all of which we believe will drive profitable growth over the next several years. Next, I'd like to share some of the business highlights from the quarter. Success in Q3 was driven by a healthy contribution from several areas of the business, and I'd like to share some examples. During Q3, we expanded our relationship with Amgen as they built on their recently completed successful SaaS transition. Amgen's next phase will include implementing two of our newer products, Validata and 340B Vigilance, which was released earlier this year. Our 340B Vigilance product helps companies maintain compliance while also distributing products to covered entities that serve the nation's most vulnerable patient populations. Amgen also expanded their use of our proprietary automated testing suite. This suite of testing tools helps customers more rapidly take seasonal releases while complying with stringent internal system validation requirements. Amgen is the latest example of a customer who experienced a successful SaaS transition, stabilized quickly, and then moved on to implement other high-value Model N products. Also during the quarter, we expanded our relationship with ICU Medical's Smith Medical division. ICU purchased Smith Medical in early 2022 and selected Model N as the revenue management platform of choice for the combined entity to help drive overall revenue synergies and compliance. Time and again, we see Model N's products leveraged as a strategic enabler to M&A and to help our customers realize their business cases. And finally, in Q3, we expanded our relationship with Regeneron Pharmaceuticals, a $12 billion biotech company. Regeneron started their Model N journey as a business services customer. As the company has scaled and matured their internal operations, they decided to expand their usage of Model N and move their processing from business services to their newly built in-house team. This transition demonstrates how Model N can grow with a customer and provide revenue management solutions tailored to each stage of a customer's growth. Turning to business services, our team continues to innovate and expand our solutions and recently launched a new state price transparency management offering. During the quarter, longtime customer Catalyst Pharmaceuticals added this new offering while also expanding usage to include chargebacks and managed care processing capabilities. Turning to high tech, we continue to see green shoots in this area of our business as industry leaders start to invest with an eye towards the future. In Q3, AMD continued to expand their usage of Model N. AMD recently acquired Xilinx and is working to unify the company's systems and processes, and Model N will be the platform of choice for the combined company. This is another great example of Model N playing a key role in enabling strategic M&A. AMD also added our new product, Engage, which is an embedded analytics and learning solution that helps train new users while also providing key insights into application usage. Also in Q3, Kyocera AVX, a leading global manufacturer of advanced electronic components, continued their global rollout of Model N's revenue cloud. They also added a large number of internal users during the quarter. Turning to professional services, our team exceeded expectations with a very strong quarter once again. The results of our professional services organization symbolize the strong demand for our mission critical high ROI solutions as companies seek to drive top and bottom line improvements. Our professional services team continues to do a terrific job of getting new customers live on time and on budget. One recent example is UCB. UCB, who is also one of our SaaS transition pioneers, is a multinational biopharmaceutical company headquartered in Belgium that also has operations in the US. In Q3, UCB went live on our state price transparency management solution. This project enabled UCB to implement standard business processes to inventory state price transparency rules, track applicable price change events, and create and file the necessary regulatory reports. Now that UCB is live, they will more easily be able to keep up with the increasing complexity and enforcement around state price transparency regulations. As I mentioned earlier, we hosted Rainmaker during Q3, in person for the first time since the pandemic. It was a great event, and this year we had the highest attendance of any Rainmaker in person or virtual in our history. This thought leadership event brings together people from around the world from the life sciences and high-tech industries. Our customers, team members, and partners all came out of Rainmaker very energized and excited for the future, not just Q4, but the next several years. As I reflect on Rainmaker, our team did a really nice job this year, making this an industry event and not just a user conference. When I look at the content and the attendees at this event, I can say it was truly a strategic industry event. In fact, some of the best sessions were the ones discussing important industry trends. This year's Rainmaker demonstrates the progress we've made transforming Model N and elevating to be a strategic partner to the industries we serve. In addition to industry trends, we also had a healthy dose of product content, including several positive case studies on customers that have moved to the cloud. It is clear that our customers are realizing strong ROI from their SaaS transitions. For our customers that have successfully completed a transition, they are on average experiencing an 80% reduction in the time to take seasonal releases. At Rainmaker, we also laid out our vision to develop purpose-built data and analytics solutions. These solutions will sit on top of our newly built data layer and complement our existing products. We think about data and analytics in five categories, which I'll briefly describe along with some examples. The first is embedded analytics, which will be added to existing Model N solutions to improve the user experience and decision-making. One example that exists today is in our global tender management product for Life Sciences. We've embedded artificial intelligence that helps predict which tenders a customer should pursue based on predictive win probability. Next are new standalone analytic applications. These are applications that are designed to help customers solve a specific business problem. An example of this is our 340B Vigilance solution that's designed to help identify and reduce revenue leakage associated with this Medicaid purchasing program. Examples of new products in this category that we announced at Rainmaker include post-deal analytics and formulary compliance. Next are syndicated data solutions, modeling processes and stores vast amounts of industry data that is common across our customers. We believe that we have an opportunity to bring these data sources together for customers in a seamless way within our applications. An example of this that exists today is integrating external competitor pricing into global pricing management. This allows our customers to make more informed decisions on how to commercialize and launch products around the world. Next is the ability to aggregate and sell anonymized data sets. This could range from everything from market share information to competitor pricing. And then finally, we envision being able to provide benchmarking reports. This offering could provide things like industry reports focused on KPIs and trends based on the data we process. And finally, I want to call out two recent awards that we won, recognizing the importance of our DERICOR values, which stand for Dream, Align, Respect, and Excel. Our core values and culture are an important part of what makes Model N special. In June, Fortune Media and Great Place to Work honored Model N as one of this year's best places in the Bay Area to work. And then in July, Fortune and Great Places to Work honored Model N as one of this year's best workplaces for millennials. We've been very focused on our workplace and culture over the last several years, and it's great to get formal recognition for our efforts. In closing, I'd like to reiterate that our Q3 results reflect the strong collective efforts of model owners around the world. As we close out the year, we will continue building a great company, delivering value to our customers, all while driving growth and improving profitability. With that, I'd like to turn the call over to John to discuss our Q3 financial results provide guidance for the fourth quarter, and offer a preliminary outlook for our fiscal 2024. John?