Model N’s IPO

According to Gartner in 2011, life science and technology companies worldwide spent an estimated $17.3 billion on software, consulting services, and internal IT personnel dedicated to sales support, marketing, and finance. For these companies, revenue management solutions are becoming a big part of IT spending. In a report published in 2009, IDC estimated that the absence of revenue life cycle management solutions for these companies caused a loss of more than $11 billion in annual revenues.

Model N’s Offerings
Model N (NYSE: MODN) is a recently listed player that focuses on offering revenue management solutions to the life sciences and technology industry. The company was founded in 1999 by current CEO and serial entrepreneur, Zack Rinat, with whom I had spoken with a few years ago. Zack had earlier founded NetDynamics, which was sold to Sun Microsystems in 1998.

Through its solutions, Model N offers organizations the ability to align and improve the processes surrounding pricing and quoting, contract development and management, trade settlements and channel incentives. Organizations can not only minimize revenue leakage but also ensure regulatory compliance risk and avoid paying heavy fines.

Model N’s solutions include two software applications, Revenue Management Enterprise and Revenue Management Intelligence. Through the Revenue Management Enterprise suite, the company is able to record and automate processes such as pricing, contracting and incentive and rebate management. The Revenue Management Intelligence suite offers analytics into revenue management strategies.

Customers include large and mid-sized organizations within the life sciences and technologies sector such as Abbott Laboratories, Boston Scientific Corporation, Johnson & Johnson Dell, Nokia and VMware, to name a few.

Model N’s Financials
Model N offers customers access to its software suite through both a perpetual license model and a cloud-based subscription fee model. Additional revenues come from support and implementation services. The company derives the majority of revenues from the Enterprise suite, and for the fiscal year ended September 2012, the segment accounted for 85% of annual revenues.

Model N has seen rapid expansion over the past few years. Revenues have grown from $50.4 million for the year ended September 2010 to $84.3 million for the previous year. Margins, though, remain elusive due to continued investment in expansion efforts. After reporting a net income of $0.624 million in fiscal 2010, it ended the previous year with a loss of $5.69 million. For the quarter ended December 2012, revenues grew to $22.34 million, but losses also expanded to $1.3 million compared with $18.06 million in revenues and losses of $0.675 million recorded in the year ago quarter.

The company recently announced its March ended quarter results – the first set of results as a publicly traded company. Revenues for the quarter grew 21% over the year to $24.6 million and the ended the quarter with a net loss of $1.9 million compared with a loss of $4.2 million a year ago. License and implementation revenues grew from $11.7 million a year ago to $14.5 million and SaaS and maintenance revenues grew from $8.6 million to $10.1 million.

Till earlier this year, Model N had remained privately held. It had received funding of $42 million in 2000 by investors that included Accel and Accel KKR. It finally went public in March 2013 and raised $104.5 million by selling stock at $15.50 each. Soon after listing, the stock touched a high of $21.00 and is currently trading at $20.15, with a market capitalization of $204.26 million.

Analysts believe that Model N will be a good stock to watch out for given its niche product. The IPO funding will also help it expand through acquisitions. Its last acquisition took place in early last year when they bought LeapfrogRX, a company known for pharma- and biotech-focused BI solutions. LeapfrogRX has helped Model N strengthen the analytics component of its solutions.