It has been about a month since the last earnings report for Model N (MODN - Free Report) . Shares have lost about 6.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Model N due for a breakout? 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 catalysts.
Model N Tops Q2 Earnings, Raises ‘19 Guidance
Model N delivered second-quarter fiscal 2019 non-GAAP earnings of 1 cent per share beating the Zacks Consensus Estimate by 4 cents. Notably, the Zacks Consensus Estimate was pegged at a loss of 3 cents. However, the figure declined by 50% from the year-ago earnings of 2 cents per share.
Revenues came in at $34.8 million, slightly ahead of Zacks Consensus Estimate of $34.6 million. The figure was also higher than management’s guided range of $34.3 million to $34.7 million. However, the top line declined 11.2% from the year-ago quarter.
Notably, Model N adopted ASC 606 from first-quarter fiscal 2019.
The company is making steady progress in its transformation to a Software-as-a-Service (SaaS) based model.
Quarter in Detail
Model N is reported earnings results under two business lines, namely, Subscription and Professional Services, from first-quarter fiscal 2019. Notably, the company previously reported under two domains —SaaS & Maintenance and License & Implementation.
In second-quarter fiscal 2019, Subscription revenues of almost $25.9 million grew 8.1% year over year. Notably, Model N is accelerating its transition of revenue management to cloud.
This has enabled the company to aid more than 60% of its customers to go live on one or more of its cloud products.
Management is optimistic on successful transition of Gilead Sciences to a 100% SaaS model from a traditional on-premise model.
Professional Services revenues declined 41.5% on a year-over-year basis to $8.9 million, primarily owing to “legacy on-premise implementations.”
Non-GAAP gross profit declined 15.4% from the year ago quarter to $19.6 million. Non-GAAP gross margin (adjusted for deferred revenues) contracted 270 bps from the year-ago-figure to 56.3%.
Adjusted EBITDA declined 38.8% year over year to $1.8 million.
Total operating expenses of $22.8 million fell 6.3% on a year-over-year basis. As a percentage of total revenues, the figure expanded 340 bps year over year.
Non-GAAP income from operations declined almost 32% year over year to $1.5 million in the second quarter. Non-GAAP operating margin (as a percentage of revenues before deferred revenue adjustment) contracted 140 bps to 4.3%.
Balance Sheet & Cash Flow
Model N exited the second quarter with cash and cash equivalents of $54.1 million compared with $52.2 million reported in the previous quarter.
In the reported quarter, the company paid $4.8 million in debt. As of Mar 31, 2019, the company had total debt (including current portion) of almost $49 million, down from $53.6 million reported in the previous quarter.
For six-months ended Mar 31, 2019, net cash generated by operating activities and free cash flow came in at $0.5 million and $0.3 million, respectively. Notably, for six-months ended Mar 31, 2018, Model N used approximately $5 million net cash in operating activities and reported free cash flow of ($5.1million).
The company anticipates fiscal third-quarter 2019 GAAP revenues to come in the range of $33.9 million to $34.3 million.
Non-GAAP net income is anticipated to be in between in line results to 2 cents per share for the third quarter.
Adjusted EBITDA is anticipated to be in the range of $1.8 million to $2.2 million.
For fiscal 2019, management revised guidance. Model N now expects GAAP revenues to be in the range of $138.5 million to $142.5 million, inching up slightly from the prior guided range of $138-$142 million. Adoption of ASC 606 is anticipated to reduce overall fiscal 2019 revenues by 7.2 million.
Non-GAAP earnings are expected to be in the range of 10-17 cents per share, compared with previously guided 5-17 cents.
Adjusted EBITDA is now projected to be in the range of $9.5 million to $12.5 million, compared with earlier predicted 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 -35% due to these changes.
Currently, Model N has a great Growth Score of A, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.