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MODN > SEC Filings for MODN > Form 10-K on 9-Dec-2013All Recent SEC Filings

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Form 10-K for MODEL N, INC.


9-Dec-2013

Annual Report


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 provider of revenue management solutions for the life science and technology industries. Our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue lifecycle from a series of tactical, disjointed operations into a strategic end-to-end process. We believe our solutions serve as the system of record for our customers' revenue management processes and can provide a competitive advantage for them.

Our solutions are comprised of two complementary suites of software applications: Revenue Management Enterprise and Revenue Management Intelligence. Sales of our solutions range from individual applications to complete suites, and deployments may vary from specific divisions or territories to enterprise-wide implementations.

We derive revenues primarily from the sale of our on-premise and cloud-based solutions and related implementation services, as well as maintenance and support and application support. We price our solutions based on a number of factors, including revenues under management and number of users. Our license and implementation revenues are comprised of sales of perpetual license and related implementation services, which revenues are recognized over the implementation period, which commences when implementation work begins and typically ranges from a few months to three years. Maintenance and support revenues are recognized ratably over the support period, which is typically one year. SaaS revenues for cloud-based solutions are derived from subscription fees from customers accessing our cloud-based solutions, as well as from associated implementation services. The actual timing of revenue recognition may vary based on our customers' implementation requirements and availability of our services personnel.

We market and sell our solutions to customers in the life science and technology industries. While we have historically generated the substantial majority of our revenues from companies in the life science industry, we have also grown our base of technology customers and intend to continue to focus on increasing the revenues from customers in the technology industry. Our most significant customers in any given period generally vary from period to period due to the timing of implementation and related revenue recognition over those periods of larger projects. During the fiscal year ended September 30, 2013, two customers, Merck & Co., Inc. and Johnson & Johnson Health Services, Inc., accounted for approximately 12% each of our total revenues. During the fiscal year ended September 30, 2012, two customers accounted for approximately 14% and 10% of our total revenues, respectively. During the fiscal year ended September 30, 2011, two customers accounted for 15% and 12% of our total revenues, respectively. For the fiscal year ended September 30, 2013, approximately 14% of our revenues were derived from customers located outside the United States.

For the fiscal years ended September 30, 2011, 2012 and 2013, our revenues were $65.2 million, $84.3 million and $101.9 million, respectively, representing year-over-year growth of approximately 21% from 2012 to 2013 and year-over-year growth of approximately 29% from 2011 to 2012. As announced in September 2013, we recently experienced challenges in sales execution and do not anticipate maintaining this growth rate throughout our 2014 fiscal year. On September 30, 2013, the Company commenced a plan to align its workforce with the company's strategic initiatives. The Company recorded a workforce reduction restructuring charge of $1.2 million in connection with the alignment.


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Key Business Metrics

In addition to the measures of financial performance presented in our Consolidated Financial Statements, we use certain key metrics to evaluate and manage our business, including four-quarter revenues from current customers and Adjusted EBITDA. We use these key metrics internally to manage the business, and we believe they are useful for investors to compare key financial data from various periods.

Four-Quarter Revenues From Existing Customers

We derive a large majority of revenues from existing customers, which we define as customers from which we have generated revenues in each of the preceding four quarters, which would exclude historical customers of LeapFrogRx. We measure four-quarter revenues from our existing license and subscription customers by calculating the sum of revenues recognized during the last four quarters from any customer that has contributed revenue in each of the preceding four quarters. We believe four-quarter revenues from existing customers provide us and investors with a metric to measure the historical revenue visibility in our business. We also use this metric internally to understand the proportion of revenues being generated in any period from existing customers as compared to entirely new customers or customers with whom we have not been recently engaged. This measure helps us guide our sales activities and establish budgets and operational goals for our sales function.

Our four-quarter revenues from existing customers for the periods presented were as follows:

                                                                        Four Quarters Ended
                              June 30,        September 30,        December 31,        March 31,       June 30,        September 30,
                                2012              2012                 2012              2013            2013              2013
                                                                            (unaudited)
                                                                          (in thousands)
Four-quarter revenues         $  73,157      $        76,892      $       77,633      $    82,956      $  85,856      $        91,961


Non-GAAP Financial Measure

Adjusted EBITDA

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States (U.S. GAAP). We define Adjusted EBITDA as net loss before LeapFrogRx compensation charges, as discussed below, stock-based compensation, depreciation and amortization, interest expense, net, other income (expenses), net, and provision for income taxes. 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. We also use this measure internally to establish budgets and operational goals to manage our business and evaluate our performance.

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP. These limitations include:

Adjusted EBITDA does not include the effect of the LeapFrogRx compensation charges, which are a cash expense;

Adjusted EBITDA does not reflect stock-based compensation expense;

Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;


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Adjusted EBITDA does not reflect restructuring expense;

Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

                                               Fiscal Years Ended September 30,
                                            2013              2012             2011
                                                        (in thousands)
    Reconciliation of Adjusted EBITDA:
    Net income (loss)                    $     (926 )      $    (5,693 )    $    1,482
    Adjustments:
    LeapFrogRx compensation charges             815              4,873              -
    Stock-based compensation                  4,856              2,521             531
    Depreciation and amortization             2,207              1,760           1,211
    Restructuring                             1,215                 -               -
    Interest expense, net                       357                655             677
    Other expense, net                          658                540             316
    Provision for income taxes                  439                301             172

    Adjusted EBITDA                      $    9,621        $     4,957      $    4,389

Adjusted EBITDA was $9.6 million, $5.0 million and $4.4 million for the fiscal years ended September 30, 2013, 2012 and 2011, respectively. Our Adjusted EBITDA for the fiscal years ended September 30, 2013 and 2012 increased primarily due to increases in total revenues, which were partially offset by increased expenses. The increase in expenses was primarily due to increases in personnel costs arising principally from headcount and salary increases and increased use of third-party contractors.

Key Components of Results of Operations

Revenues

Revenues are comprised of license and implementation revenues and SaaS and maintenance revenues.

License and Implementation

License and implementation revenues are generated from the sale of software licenses for our on-premise solutions and related implementation services. We expect our license and implementation revenues for the fiscal year 2014 to be lower than those recorded in the current fiscal year ended on September 30, 2013 due to our recent sales execution challenges.

SaaS and Maintenance

SaaS and maintenance revenues primarily include subscription and related implementation fees from customers accessing our cloud-based solutions and revenues associated with maintenance contracts from license customers. Also included in SaaS and maintenance revenues are other revenues, including revenues related to application support, training and customer-reimbursed expenses. Prior to 2012, revenues from subscriptions for our cloud-based solutions were not material; however, following our acquisition of LeapFrogRx in January 2012, they have increased but remain less than 15% of our total revenues. Over time, we expect that SaaS revenues will increase as a percentage of total revenues.


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Cost of Revenues

Our total cost of revenues is comprised of the following:

License and Implementation

Cost of license and implementation revenues includes costs related to the implementation of our on-premise solutions. Cost of license and implementation revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation and overhead allocation as well as third-party contractors, royalty fees paid to third parties for rights to their intellectual property and travel-related expenses. Cost of license and implementation revenues may vary from period to period depending on a number of factors, including the amount of implementation services required to deploy our solutions and the level of involvement of third-party contractors providing implementation services. We expect our cost of license and implementation revenues to be lower in fiscal year 2014 as compared with the fiscal year ended on September 30, 2013, due primarily to lower expected revenues described above.

SaaS and Maintenance

Cost of SaaS and maintenance revenues includes those costs related to the implementation of our cloud-based solutions, maintenance and support and application support for our on-premise solutions and training. Cost of SaaS and maintenance revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as reimbursable expenses, third-party contractors and data center-related expenses. We believe that cost of SaaS and maintenance revenues will continue to increase in absolute dollars as we continue to focus on building infrastructure for our cloud-based solutions.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and overhead allocation as well as third-party contractors and travel-related expenses. Our software development costs for new software solutions and enhancements to existing software solutions are generally expensed as incurred. However, we capitalize development costs incurred in connection with the development of certain additional service offerings that will only be offered through the cloud. As of September 30, 2013, we had $5.1 million of capitalized software development costs. On September 30, 2013, the software became available for general release to our customers, and the future costs will be expensed, as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to develop new applications and enhance our existing software solutions.

Sales and Marketing

Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, and overhead allocation as well as third-party contractors, travel-related expenses and marketing programs. We recognize sales commission expense upon contract signing, while we recognize revenue over the period the services are provided. We expect our sales and marketing expenses to increase in absolute dollars as we increase the number of our sales and marketing employees to grow in our business.


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General and Administrative

Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation, and overhead allocation, audit and legal fees as well as third-party contractors and travel-related expenses. We expect to continue to incur significant accounting and legal costs related to being a public company, as well as insurance, investor relations and other costs. In addition, we expect to continue to incur additional costs related to the implementation of a new ERP system.

LeapFrogRx Compensation Charges

In January 2012, we acquired LeapFrogRx for initial cash consideration of $3.0 million as well as potential additional payments to former LeapFrogRx stockholders totaling up to $8.3 million, which are expected to be incurred through January 2015. These additional payments are, among other things, subject to future continued employment and are therefore considered compensatory in nature and are being recognized as compensation expense (LeapFrogRx compensation charges) over the term of each component. As of September 30, 2013, we had expensed an aggregate of $5.7 million of LeapFrogRx compensation charges.

Results of Operations

The following tables set forth our consolidated results of operations for the
periods presented and as a percentage of our total revenues for those periods.
The period-to-period comparison of financial results is not necessarily
indicative of financial results to be achieved in future periods.



                                                   Fiscal Years Ended September 30,
                                                  2013              2012          2011
                                                            (in thousands)
 Consolidated Statements of Operations Data:
 Revenues:
 License and implementation                    $    59,134        $ 49,756      $ 41,499
 SaaS and maintenance                               42,770          34,502        23,672

 Total revenues                                    101,904          84,258        65,171

 Cost of Revenues:
 License and implementation(1)                      26,832          22,483        18,092
 SaaS and maintenance(1)                            19,350          18,053         8,828

 Total cost of revenues                             46,182          40,536        26,920

 Gross profit                                       55,722          43,722        38,251
 Operating Expenses:
 Research and development(1)                        16,772          17,695        13,809
 Sales and marketing(1)                             21,144          19,640        13,935
 General and administrative(1)                      16,063          10,584         7,860
 Restructuring                                       1,215              -             -

 Total operating expenses                           55,194          47,919        35,604

 Income (loss) from operations                         528          (4,197 )       2,647
 Interest expense, net                                 357             655           677
 Other expenses, net                                   658             540           316

 Income (loss) before income taxes                    (487 )        (5,392 )       1,654
 Provision for income taxes                            439             301           172

 Net income (loss)                             $      (926 )      $ (5,693 )    $  1,482


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(1) Includes stock-based compensation as follows:

                                             Fiscal Years Ended September 30
                                          2013              2012            2011
                                                      (in thousands)
      Cost of revenues:
      License and implementation       $       591       $       298      $      92
      SaaS and maintenance                     622               561             29
      Research and development                 747               297            127
      Sales and marketing                    1,687             1,103            108
      General and administrative             1,209               262            175

      Total stock-based compensation   $     4,856       $     2,521      $     531

                                              Fiscal Years Ended September 30,
                                          2013              2012              2011
    Revenues:
    License and implementation                 58 %              59 %              64 %
    SaaS and maintenance                       42                41                36

    Total revenues                            100               100               100

    Cost of Revenues:
    License and implementation                 26                27                28
    SaaS and maintenance                       19                21                13

    Total cost of revenues                     45                48                41

    Gross profit                               55                52                59
    Operating Expenses:
    Research and development                   17                21                21
    Sales and marketing                        21                23                22
    General and administrative                 16                13                12
    Restructuring                               1                -                 -

    Total operating expenses                   55                57                55

    Income (loss) from operations              -                 (5 )               4
    Interest expense, net                      -                  1                 1
    Other expenses, net                         1                 1                 1

    Income (loss) before income taxes          (1 )              (7 )               2
    Provision for income taxes                 -                 -                 -

    Net income (loss)                          (1 )%             (7 )%              2 %

Comparison of the Fiscal Years Ended September 30, 2013 and 2012

Revenues



                                               Fiscal Years Ended September 30,
                                              2013                            2012                      Change
                                                   % of Total                     % of Total
                                    Amount          Revenues         Amount        Revenues          ($)        (%)
                                                          (in thousands, except percentages)
Revenues:
License and implementation        $    59,134               58 %    $ 49,756               59 %    $  9,378       19 %
SaaS and maintenance                   42,770               42        34,502               41         8,268       24

Total revenues                    $   101,904              100 %    $ 84,258              100 %    $ 17,646       21 %


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License and Implementation

License and implementation revenues increased $9.4 million, or 19%, to $59.1 million for the fiscal year ended September 30, 2013 from $49.8 million for the fiscal year ended September 30, 2012. Our revenues from existing customers were $46.6 million for the fiscal year ended September 30, 2013 and $41.9 million for the fiscal year ended September 30, 2012. The increase was due to an increased volume of activity.

SaaS and Maintenance

SaaS and maintenance revenues increased $8.3 million, or 24%, to $42.8 million for the fiscal year ended September 30, 2013 from $34.5 million for the fiscal year ended September 30, 2012. The increase in SaaS and maintenance revenues was primarily driven by an increase of $4.6 million in SaaS revenues. Our maintenance and support, application support and training revenues increased $3.7 million in the period primarily due to an increase in the number of service contracts.

Cost of Revenues



                                                 Fiscal Years Ended September 30,
                                                 2013                           2012                     Change
                                                          % of                         % of
                                       Amount           Revenues        Amount       Revenues         ($)        (%)
                                                            (in thousands, except percentages)
Cost of revenues:
License and implementation           $    26,832               45 %    $ 22,483             45 %    $  4,349       19 %
SaaS and maintenance                      19,350               45        18,053             52         1,297        7

Total cost of revenues               $    46,182               45      $ 40,536             48      $  5,646       14

Gross profit:
License and implementation           $    32,302               55 %    $ 27,273             55 %    $  5,029       18 %
SaaS and maintenance                      23,420               55        16,449             48         6,971       42

Total gross profit                   $    55,722               55      $ 43,722             52      $ 12,000       27

License and Implementation

Cost of license and implementation revenues increased $4.3 million, or 19%, to $26.8 million during the fiscal year ended September 30, 2013 from $22.5 million for the fiscal year ended September 30, 2012. This increase was in line with the 19% year-on-year increase in license and implementation revenue during the fiscal year ended September 30, 2013. As a percentage of revenue, cost of license and implementation revenues remained at 45% in fiscal year 2013. The increase in the cost of license and implementation revenue was primarily the result of an increase of $4.7 million in personnel costs due primarily to increased headcount and stock-based compensation expense and a $0.2 million increase in royalty fees paid to third parties, partially offset by a reduction of $0.6 million in outside services, travel and other expenses.

SaaS and Maintenance

Cost of SaaS and maintenance revenues increased $1.3 million, or 7%, to $19.4 million during the fiscal year ended September 30, 2013 from $18.1 million for the fiscal year ended September 30, 2012. This increase was associated with the 24% year-on-year increase in SaaS and maintenance revenue during the fiscal year ended September 30, 2013, which was primarily due to an increase of $0.8 million in third-party contractors, an increase of $0.3 million in personnel costs and other expenses and an increase of $0.2 million in customer reimbursable expenses. As a percentage of revenue, cost of SaaS and maintenance revenues decreased from 52% in fiscal year 2012 to 45% in fiscal year 2013 primarily due to the increase in overall revenues and the relatively fixed nature of certain associated costs.


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Operating Expenses



                                        Fiscal Years Ended
                                           September 30,
                                         2013           2012            Change
                                        Amount         Amount        ($)        (%)
                                           (in thousands, except percentages)
        Operating expenses:
        Research and development     $     16,772     $ 17,695     $  (923 )      (5 )%
        Sales and marketing                21,144       19,640       1,504         8
        General and administrative         16,063       10,584       5,479        52
        Restructuring                       1,215           -        1,215

        Total operating expenses     $     55,194     $ 47,919     $ 7,275        15

Research and Development

Research and development expenses decreased by $0.9 million, or 5%, to $16.8 million during the fiscal year ended September 30, 2013 from $17.7 million for the fiscal year ended September 30, 2012. The decrease was primarily the result of an increase of $2.0 million in capitalization of software development costs, partially offset by an increase of $0.5 million in personnel costs due primarily . . .

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