Nov. 15, 2019, 4:53 p.m. EST

10-K: MODEL N, INC.

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(EDGAR Online via COMTEX) -- ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this report. Overview We are a leading provider of cloud revenue management solutions for life sciences and high tech companies. Our software helps companies drive mission critical business processes such as pricing, quoting, contracting, regulatory compliance, rebates and incentives. With deep industry expertise, Model N supports the complex business needs of the world's leading brands in life sciences and high tech across more than 120 countries, including Johnson & Johnson, AstraZeneca, Novartis, Microchip Technology, and ON Semiconductor. Model N Revenue Cloud transforms the revenue life cycle into a strategic, end-to-end process aligned across the enterprise. Our industry specific solution suites offer a range of solutions from individual applications to complete suites. Deployments may vary from specific divisions or territories to enterprise-wide implementations. We derive revenues primarily from the sale of subscriptions to our cloud-based solutions, as well as subscriptions for maintenance and support and managed support services related to on-premise solutions. We price our solutions based on a number of factors, including revenues under management and number of users. Subscription revenues are recognized ratably over the coverage period. We also derive revenues from selling professional services related to past sales of perpetual licenses and implementation and professional services associated with our cloud-based solutions. The actual timing of revenue recognition may vary based on our customers' implementation requirements and the availability of our services personnel. We market and sell our solutions to customers in the life sciences and high tech industries. Historically, our growth was driven by the sale of on-premise solutions. Over the last few years, we shifted our focus to selling cloud-based software and in 2017, we started transitioning customers with on-premise software to cloud-based software. Our most significant customers in any given period generally vary from period to period due to the timing in the delivery of our professional services and related revenue recognition. During the fiscal year ended September 30, 2019, no customer represented more than 10% of our total revenues or more than 10% of our subscription revenues. During the fiscal years ended September 30, 2018, and 2017, one customer, Johnson & Johnson, accounted for approximately 15% and 11% of our total revenues, respectively. No customer represented more than 10% of our subscription revenues during the fiscal years ended September 30, 2019, 2018, and 2017. For the fiscal years ended September 30, 2019, 2018, and 2017, approximately 8%, 12%, and 11% of our total revenues were derived from customers located outside the United States respectively. For the fiscal years ended September 30, 2019, 2018, and 2017, our total revenues were $141.2 million, $154.6 million and $131.2 million, respectively, representing a year-over-year decrease of approximately 9% from 2018 to 2019 and year-over-over increase of approximately 18% from 2017 to 2018. Revenues decreased in the 2019 fiscal year primarily due to the reduction in professional services revenue as we moved towards cloud-based solutions. Revenues increased in the 2018 fiscal year primarily due to improvement in sales execution and the full year effect of the acquisition of Revitas. Key Business Metrics In addition to the measures of financial performance presented in our Consolidated Financial Statements, we use adjusted EBITDA to establish budgets and operational goals and to evaluate and manage our business internally. We believe adjusted EBITDA provides investors with consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our operating results and our competitors' operating results. See "Non-GAAP Financial Measure" below.

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Key Components of Results of Operations

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Sales and Marketing







                                                         Fiscal Years Ended September 30,
                                                         2019           2018          2017
                                                                  (in thousands)
        Consolidated Statements of Operations Data:
        Revenues:
        Subscription                                $   105,219      $  98,308     $  86,151
        Professional Services                            36,016         56,324        45,018
        Total revenues                                  141,235        154,632       131,169
        Cost of Revenues:
        Subscription                                     35,218         37,820        38,172
        Professional Services                            30,912         27,514        22,924
        Total cost of revenues                           66,130         65,334        61,096
        Gross profit                                     75,105         89,298        70,073
        Operating Expenses:
        Research and development                         30,009         32,416        31,064
        Sales and marketing                              32,894         35,482        41,339
        General and administrative                       27,213         42,178        36,281
        Total operating expenses                         90,116        110,076       108,684
        Loss from operations                            (15,011 )      (20,778 )     (38,611 )
        Interest expense, net                             2,933          8,178         4,159
        Other expenses (income), net                        319           (722 )          62
        Loss before income taxes                        (18,263 )      (28,234 )     (42,832 )
        Provision for (benefit from) income taxes         1,030            (27 )      (3,285 )
        Net loss                                    $   (19,293 )    $ (28,207 )   $ (39,547 )
        


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Comparison of the Fiscal Years Ended September 30, 2019 and 2018







        Revenues
                                                 Fiscal Years Ended September 30,
                                                  2019                         2018
                                                            % of                      % of
                                                            Total                     Total              Change
                                           Amount         Revenues      Amount      Revenues        ($)          (%)
                                                             (in thousands, except percentages)
        Revenues:
        Subscription                 $    105,219              74 %   $  98,308          64 %   $   6,911           7  %
        Professional services              36,016              26        56,324          36       (20,308 )       (36 )
        Total revenues               $    141,235             100 %   $ 154,632         100 %   $ (13,397 )        (9 )%
        


Subscription







        Cost of Revenues
                                                Fiscal Years Ended September 30,
                                                 2019                         2018
                                                         % of                       % of                Change
                                         Amount        Revenues       Amount      Revenues         ($)          (%)
                                                             (in thousands, except percentages)
        Cost of revenues
        Subscription                 $     35,218          33 %     $ 37,820          38 %     $  (2,602 )        (7 )%
        Professional services              30,912          86         27,514          49           3,398          12
        Total cost of revenues       $     66,130          47 %     $ 65,334          42 %           796           1  %
        Gross profit
        Subscription                 $     70,001          67 %     $ 60,488          62 %     $   9,513          16  %
        Professional services               5,104          14         28,810          51         (23,706 )       (82 )
        Total gross profit           $     75,105          53 %     $ 89,298          58 %     $ (14,193 )       (16 )%
        


Subscription

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in both absolute dollars and as a percentage of professional services revenues is due to the fact that professional services personnel were not utilized in other departments within the company in fiscal year 2019, therefore reducing the allocations to other departments.







        Operating Expenses
                                         Fiscal Years Ended September 30,
                                               2019              2018                   Change
                                              Amount            Amount            ($)             (%)
                                                        (in thousands, except percentages)
        Operating expenses:
        Research and development         $        30,009     $    32,416     $    (2,407 )           (7 )%
        Sales and marketing                       32,894          35,482          (2,588 )           (7 )
        General and administrative                27,213          42,178         (14,965 )          (35 )
        Total operating expenses         $        90,116     $   110,076     $   (19,960 )          (18 )%
        


Research and Development







                                          Fiscal Years Ended September 30,
                                                2019              2018                   Change
                                               Amount            Amount            ($)             (%)
                                                         (in thousands, except percentages)
        Interest expense, net            $          2,933     $     8,178     $    (5,245 )          (64 )%
        Other (income) expenses, net     $            319     $      (722 )   $     1,041           (144 )%
        


Interest expense, net, decreased by $5.2 million from $8.2 million during the fiscal year ended September 30, 2018, to $2.9 million during the fiscal year ended September 30, 2019. The decrease was driven by approximately $3.1 million of loss on extinguishment in connection with the refinancing of the term loan recorded in fiscal year ended September 30, 2018, as well as the lower interest rate as a result of the refinancing. See "Note 7. Debt" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. The increase in other (income) expense, net was primarily due to currency fluctuation.







                                           Fiscal Years Ended September 30,
                                                 2019                2018                   Change
                                                Amount              Amount            ($)             (%)
                                                          (in thousands, except percentages)
        Provision for (benefit from)
        income taxes                     $            1,030     $        (27 )   $     1,057         (3,915 )%
        


The provision for income taxes in fiscal year 2019 is primarily related to foreign taxes on our profitable foreign operations. The increase in the provision during fiscal year ended September 30, 2019, was primarily driven by the foreign withholding taxes

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we paid in the first quarter of fiscal year 2019 due to the repatriation of certain foreign subsidiary earnings to the United States, as well as the fact that in the first six months of fiscal year 2018, we recorded one-time benefits related to deferred tax liabilities caused by the reduced corporate tax rate and a valuation allowance release.







        Revenues
                                         Fiscal Years Ended September 30,
                                           2018                         2017
                                                     % of                     % of
                                                     Total                    Total          Change
                                    Amount         Revenues      Amount     Revenues       ($)      (%)
                                                  (in thousands, except percentages)
        Revenues:
        Subscription          $     98,308              64 %   $  86,151         66 %   $ 12,157    14 %
        Professional services       56,324              36        45,018         34       11,306    25
        Total revenues        $    154,632             100 %   $ 131,169        100 %   $ 23,463    18 %
        


Subscription







        Cost of Revenues
                                                Fiscal Years Ended September 30,
                                                 2018                         2017
                                                         % of                       % of               Change
                                         Amount        Revenues       Amount      Revenues        ($)          (%)
                                                            (in thousands, except percentages)
        Cost of revenues
        Subscription                 $     37,820          38 %     $ 38,172          44 %     $   (352 )        (1 )%
        Professional services              27,514          49         22,924          51          4,590          20
        Total cost of revenues       $     65,334          42 %     $ 61,096          47 %     $  4,238           7  %
        Gross profit
        Subscription                 $     60,488          62 %     $ 47,979          56 %     $ 12,509          26  %
        Professional services              28,810          51         22,094          49          6,716          30
        Total gross profit           $     89,298          58 %     $ 70,073          53 %     $ 19,225          27  %
        


Subscription

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decrease in these costs as a percentage of total revenues was primarily due to an increase of professional services with higher profit margins in the overall mix of sales associated with license and implementation.







        Operating Expenses
                                          Fiscal Years Ended September 30,
                                                2018               2017                   Change
                                               Amount             Amount            ($)             (%)
                                                         (in thousands, except percentages)
        Operating expenses:
        Research and development         $          32,416     $    31,064     $     1,352              4  %
        Sales and marketing                         35,482          41,339          (5,857 )          (14 )
        General and administrative                  42,178          36,281           5,897             16
        Total operating expenses         $         110,076     $   108,684     $     1,392              1  %
        


Research and Development

Nov 15, 2019

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