Why Is Model N (MODN) Down 6.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Model N (MODN). 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 the most recent earnings report in order to get a better handle on the important drivers.

Model N Q1 Earnings and Revenues Surpass Estimates

Model N, Inc. reported first-quarter fiscal 2020 non-GAAP earnings of 12 cents per share, which surpassed the Zacks Consensus Estimate by 100% and increased 300% year over year.

Revenues came in at $38.4 million, which beat the consensus mark by 3.2% and increased 9% year over year. The figure was also higher than the guided range of $37 million to $37.4 million.

Robust adoption of the company’s revenue cloud platform drove the top line. Notably, life sciences companies like Biogen (NASDAQ:BIIB) and Novo Nordisk (CSE:NOVOb) as well as a leading pharmaceutical company completed their transition to Model N’s revenue cloud platform during the quarter.

Moreover, the company is making steady progress in its transformation to a Software-as-a-Service (SaaS) based model.

Quarter in Detail

Model N has started reporting earnings under two business lines — Subscription and Professional Services — from first-quarter fiscal 2019.

In first-quarter fiscal 2020, Subscription revenues were $28.2 million, up 12% year over year. This was driven by strong sales execution, which added new subscription revenues of $17.5 million, partially offset by a decline in maintenance subscription contracts.

Professional Services revenues increased 3.4% on a year-over-year basis to $10.2 million.

Operating Details

Non-GAAP gross profit for the first fiscal quarter was $23.5 million.

Non-GAAP gross margin expanded 400 basis points (bps) from the year-ago-figure to 61%. Non-GAAP subscription gross margin during the reported quarter came in at 72% and non-GAAP gross margin for professional services was 31%.

Adjusted EBITDA during the quarter came in at $4.8 million compared with $2.9 million reported in the year-ago quarter.

Non-GAAP operating income was $4.6 million. Moreover, non-GAAP operating margin expanded 500 bps to 12%.

Balance Sheet & Cash Flow

As of Dec 31, Model N had cash and cash equivalents of $55.8 million compared with $60.8 million reported in the previous quarter.

As of Dec 31, the company had total debt (including current portion) of $44.4 million, compared with $44.3 million reported in the previous quarter.

For the three months ended Dec 31, net cash outflow from operating activities was $4.9 million and free cash outflow was $5 million.

Guidance

The company anticipates fiscal second-quarter 2020 GAAP revenues to come in between $38.8 million and $39.2 million. Second-quarter subscriptions are anticipated in the range of $28.4-$28.8 million.

Non-GAAP net income is anticipated in the range of 1 cent to 3 cents per share for the second quarter.

Adjusted EBITDA is anticipated in the range of $1.8 million to $2.2 million.

For fiscal 2020, Model N expects GAAP revenues to be in the range of $154 million to $156 million.

Fiscal 2020 subscription is projected in the range of $113-$115 million.

Non-GAAP earnings are expected in the range of 25-31 cents per share.

Adjusted EBITDA is projected in the range of $13 million to $15 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -11.54% due to these changes.

VGM Scores

At this time, Model N has an average Growth Score of C, 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 fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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 #2 (Buy). We expect an above average return from the stock in the next few months.