Why Is Model N (MODN) Up 2.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Model N (MODN). Shares have added about 2.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Model N due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Model N's Q4 Results Benefit from Strengthening Revenue Cloud Platform & Expanding Customer Base

Model N, Inc. delivered fourth-quarter fiscal 2018 non-GAAP earnings of 6 cents per share comparing favorably with the year-ago quarter’s loss of 6 cents per share. The Zacks Consensus Estimate was pegged at a loss of 2 cents.

Revenues of $36.7 million increased 3.1% from the year ago quarter, outpacing the Zacks Consensus Estimate of $35 million. The figure also outpaced the guided range of $35.2-$35.7 million.

Management noted that the company is making steady progress in its transformation to a 100% Software-as-a-Service (SaaS) based model.

Quarter in Detail

Model N has two reportable segments namely SaaS & Maintenance and License & Implementation.

SaaS & Maintenance revenues of almost $35 million grew 18.1% year over year. Model N is accelerating its transition of revenue management to cloud and is on track to shift business to a 100% SaaS and Maintenance revenue model.

License & Implementation revenues of $1.7 million declined 71.1% on a year-over-year basis. The company no longer sells on-premise perpetual licenses. Management had anticipated the decline in fourth quarter due to backlog burn off and transition of customers to cloud.

Expanding Customer Base

Model N made significant efforts in its go to market strategy in order to improve growth. Management is optimistic about its Revenue Cloud offering for med-tech, pharma and high tech companies.

The company is leaving no stone unturned to enable customers’ transition to cloud from an on-premise infrastructure. Management is elated on the rapid adoption witnessed among life sciences companies in particular, including Biogen (NASDAQ:BIIB), Novo Nordisk (CO:NOVOb), among others, which subscribed to Revenue Cloud.

Additionally, Model N’s growth prospects in the life sciences & high technology are bright due to increasing redundancy of legacy systems. The company’s solutions provide higher Return on Investment (“ROI”) as well as plug gaps in the end-to-end revenue management process that legacy systems fail to do.

The company has enhanced Revenue Cloud with Amazon (NASDAQ:AMZN) Web Services (AWS) infrastructure as part of its cloud optimization initiative. This has enabled it to aid companies like Allegro Microsystems, Edwards Life Sciences, Ipsen and Shionogi, among others in their transition.

Management is also optimistic regarding Seagate’s increased utilization of Revenue Cloud. Seagate recently subscribed to Model N’s Channel Data Management solution.

Integra Life Sciences intends to deploy Revenue Cloud across its international business units. In this regard, the life sciences company added an acquired business entity to Revenue Cloud.

The growing clout of Model N’s Global Price Management solution, Model N CPQ (Configure, Price and Quote), Model N Channel Cloud and Revenue Cloud for High Tech suites is notable.

The company’s Revenue Management platform aimed at enhancing digital reinvention experience also bodes well.

Operating Details

Non-GAAP gross profit increased to $23 million from $22.7 million recorded in the year-ago quarter. Non-GAAP margin surged to 62.8%, up from 61.3% reported in the year-ago-quarter (adjusted for deferred revenues).

Adjusted EBITDA was $2.5 million compared with $1 million in the year-ago quarter. Non-GAAP income from operations was $2 million against year-ago figure of $0.1 million.

Balance Sheet & Cash Flow

Model N exited the quarter with cash and cash equivalent balance of $56.7 million compare with $57.6 million reported in the previous quarter. The company had total debt (long-term plus current portion) of $53.7 million, as of Sep 30, 2018.

Net cash generated in operating activities came in at $2.5 million in fiscal 2018 compared with approximately $12 million used in fiscal 2017.

Fiscal 2018 at a Glance

For fiscal 2018, total revenues increased 17.8% year over year to $154.6 million. Year-over-year growth was primarily driven by a surge of 25.7% in SaaS and maintenance revenues which came in at $135.9 million. Recurring revenues came in at $98.3 million.

Non-GAAP earnings for fiscal 2018 came in at $0.04 per share, compared with the $(0.59) reported in fiscal 2017.

Guidance

Model N will report financial results as per ASC 606 guidelines from first quarter fiscal 2019. The company expects fiscal first-quarter 2019 GAAP revenues to come in the range of $34 million to $34.4 million. The company anticipates deferred revenues to be negatively impacted by roughly $8 million.

Non-GAAP earnings (loss) are likely to be between (1 cent) and 1 cent per share for the first quarter. Adjusted EBITDA is anticipated to be in the range of $2 million to $2.4 million.

For fiscal 2019, Model N expects GAAP revenues to be in the range of $138-$142 million.

Non-GAAP earnings are expected to be in the range of 5-17 cents per share. Adjusted EBITDA is projected to be in the range of $8.5-$12.5 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 5.13% due to these changes.

VGM Scores

Currently, Model N has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Model N has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.