According to a recent research report, the global revenue management market is estimated to grow 17% annually to $31 billion by the year 2025. Model N (NYSE: MODN) is a leading player in the industry that has focused its efforts on certain key verticals. Its commitment to the verticals helped it survive the dot-com bubble. The company has recently been transitioning to the cloud, and initial results are well liked by the market.
Model N’s Offerings
San Mateo-based Model N was set up in 1999 by serial entrepreneur Zack Rinat and Yarden Malka with the vision of “stopping revenue leakage and improving regulatory compliance”. Soon after Model N was set up, the economic bubble burst. But unlike other dot-com failures, Model N managed to survive. It attributes its survival to its culture and vision.
Model N’s management realized that they needed to look at developing applications on top of the technology that it already had in place, and that the applications had to offer very precise value propositions. With that objective in mind, they narrowed down on the medical device market which was not sensitive to economic conditions and there weren’t many competitors in the space. Model N has stuck to that vertical driven vision ever since.
Today, it offers revenue management tools for the pharmaceutical, medical device, high tech, semiconductor, and electronic components manufacturing industries. Its solutions cover the range of pricing and quoting, contract development and management, trade settlements, and channel incentives that help eliminate revenue leakage and reduce the financial regulatory compliance risks for organizations. Its solutions integrate industry specific needs and best practices to drive better planning and control throughout the revenue life cycle.
By 2004, Model N had raised $42 million in funding from two rounds from investors including Accel and Accel KKR along with other private investors. In 2013, the company went public on the NYSE and raised $104.5 million at a valuation of $332.3 million. It sold its shares at $15.5 apiece.
Model N’s Financials
Model N generates revenues through licensing of its software, support and maintenance, and by providing other professional services. Recently the company announced its third quarter results that outpaced market expectations. Revenues for the quarter fell 12.5% to $34.7 million, ahead of the market’s expectations of $34 million. The decline in revenues was due to the change in accounting standards for the current year. EPS was $0.06 which was significantly ahead of the street’s forecast of $0.01. A year ago, Model N had reported a loss of $0.07 per share.
Over the past few quarters, Model N has been transitioning to a subscription-based model for its SaaS revenues. For the quarter, Subscription revenues grew 6.8% to $26.6 million. Professional Services revenues fell 44.9% over the year to $8.1 million primarily due to decline in on-premise implementations.
Model N expects to end the current quarter with revenues of $35.5-$35.9 million with subscription revenues of $26.8-$27.2 million. The market was looking for total revenues of $35.3 million for the quarter. ModelN forecast an EPS of $0.06-$0.10 for the quarter compared with the Street’s forecast of $0.07. For the year, the company forecast revenues of $140.1-$140.5 million with an EPS of $0.16-$0.20. The market was looking for revenues of $139.4 million with an EPS of $0.014.
Model N’s Growth Focus
Model N has been expanding its market reach through product innovation and partner expansion. Last year, it announced a partnership with BPI Technologies Corporation, a leader in revenue recognition solutions, to help its customers make faster, better-informed decisions. Through the partnership, their customers will get access to structural and transactional data across commercial, government, and chargeback channels from Model N and a gross-to-net (GTN) revenue recognition service from BPI. The integrated solution will help customers get complete visibility into pre-deal analysis, product pricing, net revenue, accurate accruals, full audit reporting, and reliable forecasts that are critical to pharmaceutical and medical technology manufacturers.
As part of its migration to the cloud, the company released the Revenue Execution Cloud that empowers organizations to drive more efficient sales organizations by allowing them to manage sophisticated channel incentive programs and delivering increased insights and analytics. Life sciences customers will be able to use advanced analytics to get a quick feedback about the health of a deal. They will have access to better pricing strategies and will be able to get access to recent changes in prices in relevant markets and products to price their products better along with access to other revenue execution and compliance tools.
Model N has come a long way since I met Zack Rinat a few years ago. Back in 2007, the company was aspiring to become a public company. Zack Rinat stepped away from the role of a CEO and Board member last year. He is now a strategic advisor to the company he helped set up.
Its stock is currently trading at $28.45 with a market capitalization of $930.6 million. It had climbed to a year high of $29.26 earlier last month. Like other technology stocks, it had fallen to a year low of $12.60 in December last year.