Model N (NYSE:MODN) reported a robust Q4 2023, exceeding its guidance with strong revenue growth across its subscription and professional services sectors. The company, which has successfully moved 85% of its life sciences customers to the cloud, plans to complete the transition in the upcoming quarters. Key SaaS metrics showed promising results, with SaaS ARR growing 20% YoY and SaaS net dollar retention at 118%. Model N's annual SaaS revenue and adjusted EBITDA have doubled over the past three years, and the company expects to maintain this momentum into fiscal 2024.
Key takeaways from the earnings call include:
- Model N's total revenue for the fiscal year reached $249.5 million, with subscription revenue increasing by 14% to $181.4 million and professional services revenue growing by 15% to $68.1 million.
- Adjusted EBITDA increased by 34% and non-GAAP earnings per share rose by 54%.
- The company signed several new SaaS transitions in Q4, including deals with Bausch Health Companies (NYSE:BHC) and a major customer in the generic drugs industry.
- For fiscal 2024, Model N expects total revenue to be between $260 million and $263 million, subscription revenue between $193 million and $195 million, and professional services revenue to remain flat. Adjusted EBITDA is expected to be in the range of $48 million to $51 million.
CEO Jason Blessing discussed the company's growth expectations for the next year, anticipating over 50% revenue growth in core subscription services. Blessing also highlighted the importance of State Price Transparency laws to customers and the success of Model N's products in dealing with these regulations. He mentioned the release of a product called 340B Vigilance, which aids customers with the 340B purchasing program, and the company's plans to incorporate functionality related to the Inflation Reduction Act.
Despite some macro impact on their business and application services due to tightening financial markets, Model N has seen growth in professional services, particularly in their implementation team. CFO John Ederer discussed the company's midterm targets, which include a 23% to 26% adjusted EBITDA margin, driven by profitable growth, increased SaaS revenue as a percentage of total revenue, and leverage on the R&D and G&A expenses.
Model N also discussed its products and sales performance in different verticals. In Europe, the company has been selectively investing in their team, seeing strong potential for their products in the region. Despite some pressure due to macro factors in the high-tech vertical, market leaders continue to invest in projects that deliver results, benefiting Model N.
In terms of R&D, Model N has been leveraging engineering capacity from legacy code lines to support SaaS transitions, seasonal releases, and new product development. The Inflation Reduction Act is expected to drive demand for Model N's core functionality and compliance enhancements, particularly from larger pharmaceutical companies. The company ended the fiscal year with $301.4 million in cash and equivalents.
Model N's (NYSE:MODN) earnings call concluded with CEO Jason Blessing thanking employees and customers for their support and expressing anticipation for a post-SaaS transition world.
InvestingPro Insights
Model N's performance and future prospects are further highlighted by InvestingPro's real-time data and tips. With a market capitalization of 974.78M USD and a noteworthy revenue growth of 14.68% in the last twelve months as of Q3 2023, Model N's financial health seems to be on the upswing. The PEG Ratio, which stands at 0.42, suggests that the company may be undervalued given its earnings growth rate.
InvestingPro Tips offer additional insights into the company's operations and potential. The acceleration in revenue growth aligns with the company's Q4 2023 results and projected growth for fiscal 2024. The fact that net income is expected to grow this year and that 10 analysts have revised their earnings upwards for the upcoming period further bolsters the optimism surrounding Model N's financial future. The company's liquid assets exceeding short term obligations and its moderate level of debt indicate a strong financial position.
In conclusion, the InvestingPro insights suggest a positive outlook for Model N, with the potential for continued growth and profitability. For more detailed insights, readers can explore the additional tips and data available on the InvestingPro platform.
Full transcript - MODN Q4 2023:
Operator: Good afternoon, and welcome to Model N Fourth Quarter 2023 Earnings Conference. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Carolyn Bass, Investor Relations. Please go ahead.
Carolyn Bass: Good afternoon. Welcome to Model N's Fourth Quarter and Fiscal 2023 Year-end Earnings Call. This is Carolyn Bass, Investor Relations for Model N. With me on the call today are Jason Blessing, Model N's President and Chief Executive Officer; and John Ederer, Chief Financial Officer. Our earnings press release was issued at the close of market and is posted on our website. The primary purpose of today's call is to provide you with information regarding our fourth quarter performance and to offer a financial outlook for our first quarter and fiscal year ending September 30, 2024. The commentary made on this call may include statements. These forward-looking statements are based on management's current views and expectations, as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10-Q and 10-K filed with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in the earnings release issued today, which is available on our website. I encourage you to visit our Investor Relations website at investor.modeln.com to access our fourth quarter and fiscal 2023 year-end press release, periodic SEC reports, the webcast replay of this call and a supplemental Investor Relations deck for Q4, which includes some additional disclosures that John will review later on in the call. Finally, unless otherwise stated, all financial comparisons in this call will be made to our fiscal year 2022 results. And with that, let me turn the call over to Jason.
Jason Blessing: Thank you, Carolyn, and welcome to our call today. I am pleased to report that our fourth quarter results exceeded guidance for total revenue, subscription revenue and professional services revenue. We were in line with our quarterly guidance on adjusted EBITDA. Overall, Q4 was a strong quarter and demonstrates our commitment to driving profitable growth. Our Q4 SaaS metrics were also strong, driven by SaaS ARR, which grew by 20% year-over-year, while SaaS net dollar retention was 118%. Our strong SaaS ARR growth and improving profitability of prove points, that we are building a durable SaaS business. 2023 was a pivotal year in our business model transition, as we continue to successfully move our on-premise customers to the cloud. We closed out the year with approximately 85% of our life sciences customers, either live or in the process of moving to the cloud, up from 70% a year ago. As you know, we have announced end of life for our on-premise solutions on December 31, 2023. I do expect that we will have a few customers that will need one or two more quarters to sequence their SaaS transition into their IT road map, but I continue to believe that we will convert substantially all of our customers. This is a truly remarkable accomplishment by our, given the complexity and mission-critical nature of our applications. To help put this accomplishment into context, I thought it would be worth a quick recap of the business model transformation that we have driven. Over the last 3 years, both our annual SaaS revenue and adjusted EBITDA have doubled. This clearly demonstrates the leverage in our model and our philosophy of delivering profitable growth to shareholders. We have built a great SaaS franchise that provides mission-critical products to our customers. This is a great foundation for future, profitable growth as we collaborate with customers to build new products and add new customers to the Model N family. Next, I'd like to share some business highlights from the quarter. We delivered strong results that were powered by our key growth drivers of SaaS transition, selling back to the customer base and signing new logos. So let me share some examples. First, SaaS transition. As I've said on past calls, we wanted to take our tone with the final SaaS transition to make sure that we ended up with mutually favorable agreements with customers. This approach is paying off. And in Q4, we signed 5 new SaaS transitions. First, we signed a SaaS transition with Bausch Health Companies, a globally diversified pharmaceutical company, whose mission is to improve people's lives with their healthcare product. This deal builds upon a 20-year relationship between our two companies and set the stage for the next decade. Moving to our cloud will allow Bausch to more efficiently take advantage of innovation and performance improvements, while also staying compliant with the evolving regulatory landscape. We also kicked off the SaaS transition with another long-time customer, who is one of the largest producers of generic drugs in the world and employs over 20,000 people across more than 30 companies. This customer renewed their 9 country footprint with the cloud and will eventually deploy 20 additional countries over the next 5 years. During the quarter, we also signed 2 additional long-time large pharma customers to SaaS transition. Like other customers that have transitioned, these 2 customers are looking for the quicker access to innovation, improved performance, more predictable costs and, of course, easier access to new regulatory enhancements. We also continue to see SaaS transitions paid dividends by setting up additional customer base sales, as we build out a multiyear road map. During Q4, we saw this category peak at one of our major customers that they will start with a SaaS transition, as well as add new products, including Validata, Advanced Membership Management and Ngage. This example is particularly encouraging because Advanced Membership Management and Ngage are new products that we've released over the last couple of years. Validata is not a new product, but it is one of our more popular products that sets up future upsell like 340B Vigilance. This example is a clear testament to our ability to sell new products to our SaaS customers. Turning to business services. During the quarter, we signed several customer extensions and a new logo Alion. Alion decided to move from their current provider to take advantage of improved service levels around processing chargebacks, membership administration and Medicaid processing. Alion was seeking a partner with an organization that could drive improved client interactions and processing using industry best practices and technology. We had a good quarter in high tech and this segment continues to show steady improvement. In Q4, Cirrus Logic (NASDAQ:CRUS), an innovator in low-power signal technology for top mobile and consumer applications selected Model N as their revenue cloud platform of choice. Cirrus Logic has been leveraging some of our on-premise solutions and will now move all of their processing to our cloud. This move will allow them to streamline their processes, make it easier to collaborate with their partners and consume new releases. Also in Q4, Model N was selected as the Vendor of Choice to be a management at Allegro MicroSystems, a global manufacturer of sensor integrated circuits, used by the automotive and industrial markets. Allegro has a goal of reducing technology platform, while automating inefficient manual processes with channel partners. Deal management will replace multiple homegrown systems and help Allegro better manage global prices, automated loading and discount controls. Turning to professional services. Our team exceeded expectations with another strong quarter. The results of our professional services organization symbolized the strong demand for our mission-critical solutions, as companies seek to drive top and bottom line improvement. Our professional services team continues to do a terrific job of getting new customers live, on time and on budget. One project in particular, that I'd like to call out is J&J and their successful cloud go live to support their Pharma business. J&J is a longstanding Model N customer and this project required the key to ensure success in 2 key areas: J&J's complex integrations with their downstream IT infrastructure, as well as a customer reporting system. We were able to meet the needs of the customer, and we were also able to pull the go-live forward by 1 full month to accommodate J&J's quarter-end requirements. As we focus on the future, we continue to build new products in collaboration with our customers. Two recent examples that launched in Q4 are channel collaborations and Medicaid automated invoice retrieval. Channel collaboration is a new portal that allows our high-tech customers to collaborate in real time with training partners around sales and incentive data. Historically, this business process was done manually via e-mail and was sought repairs. Our channel collaboration portal will allow customers to more accurately pay their partners, which will drive efficiencies in channel costs and improve overall channel partner satisfaction. Also during Q4, we started to deploy Medicaid automated invoice retrieval with our design partners, including one of our top 5 global pharma customers. This new product is a robotic process automation enabled service that automates acquisition and ingestion of quarterly Medicaid invoices, which was historically been done manually and therefrom. Manufacturer using this offering can expect significant productivity and cost improvements each year. We expect to make this product generally available this quarter. In closing, I am extremely pleased with another year of driving profitable growth. Our fiscal 2023 results reflect the strong collective effort of Model N around the world. As I outlined at the start of the call, our successful 5 transition is clearly showcased by the leverage we've demonstrated in our model in a very short period of time. Both our annual SaaS revenue and adjusted EBITDA, have doubled in just 3 years. Looking ahead, our objective is to continue to deliver value to our customers, while driving growth and improving profitability. With that, I'll turn the call over to John to discuss our Q4 financial results and offer our outlook for Q1 in fiscal 2024. John?
John Ederer: Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we delivered another good quarter in Q4, and we closed out fiscal 2023 with every metric, total revenue, subscription revenue, professional services revenue, adjusted EBITDA and earnings per share, all exceeding the high end of the guidance range, that we set at the beginning of the fiscal year. I was particularly pleased by our profit performance with adjusted EBITDA growing by 34% in fiscal 2023 and non-GAAP earnings per share up 54% for the year. As Jason also described, we are working through the final cohort of SaaS transition. And we'll talk a little more about the impact of our business model in a few minutes. Looking specifically at our financial results for the fourth quarter. Total revenue grew $64 million, which exceeded the top end of our guidance. Subscription revenue increased by 8% to $46.4 million, also exceeding the upper end of our guidance range. Lastly, professional services revenue by 15% to $17.5 million, which was above the high end of our guidance, as the team continued to run at high utilization rates. In terms of our profitability, please keep in mind that we'll be discussing non-GAAP numbers and a full reconciliation of our results is provided in our earnings release. For the fourth quarter, total non-GAAP gross profit was $39.6 million, representing a gross margin of 61.9% and up slightly on a sequential basis from Q3. Total non-GAAP subscription gross margin was 69.2%, which was flat sequentially from Q3. And non-GAAP Professional Services gross margin was 42.3% in Q4, which once again was exceptional performance by the team. Operating expenses for Q4 were higher than expected, due to roughly $2 million of nonrecurring G&A expenses, related to a corporate development initiative that we are no longer pursuing. We expect another $1 million of expense related to this in Q1 of FY '24. As a result, adjusted EBITDA was $11 million, an increase of 34% from the fourth quarter of fiscal 2022, but at the low end of our guidance range for the quarter. Adjusted EBITDA margin improved to 17.2% compared to 14.1% for the fourth quarter last year. Finally, non-GAAP income for Q4 was $12.2 million, up 59% year-over-year and non-GAAP earnings per share were $0.31, which was at the high end of our guidance. For the full year of fiscal 2023, total revenue grew 14% to $249.5 million, subscription revenue increasing by 14% to $181.4 million and Professional Services revenue up 15% to $68.1 million. Gross profit grew to 152.6 million, representing a gross margin of 61%. Adjusted EBITDA grew by 34% to $42.9 million, representing an EBITDA margin 17.2% versus 14.6% last year, and non-GAAP earnings per share grew by 54% to $1.11 versus $0.72 last year. Turning to our SaaS metrics for Q4, our SaaS ARR reached $131.2 million, which was an increase of $21.8 million or 20% versus Q4 of last year. In addition, trailing 12-month SaaS net retention was 118% in Q4. Earlier this year, our SaaS ARR growth rate and net retention metrics partially benefited from SaaS transition activity, reaching a peak in our fiscal Q2 this year. The Q4 results were right in line with our target. In terms of the balance sheet, we ended fiscal 2023 with $301.4 million in cash and equivalents, which was up $108 million from the end fiscal 2022. Approximately $80 million of the increase in cash was due to the refinancing of our convertible debt in the second quarter with the remainder coming primarily from operations. Turning to remaining performance obligations. Our total RPO for Q4 was $344.6 million, which was up 3% on a year-over-year basis. The current portion of our RPO balance was up to $148.3 million, representing growth of 12% year-over-year. As I noted last quarter, our total RPO has been impacted by SaaS transition activity, over the last year or so. We had a period of outsized growth last year due to a number of long-term SaaS transition deals, often with contract lengths, well in excess of 3 years. These longer-term commitments added extra years to the total contract value reflected in our RPO. As renewals and other non-SaaS transition bookings become a bigger proportion of the total, we are seeing our average contract length in RPO, return to a more normalized level. Before we get into the details of our guidance for next year. We recognize that it can be difficult to understand some of the underlying trends in the business during the transition. A strong growth in SaaS revenue has been partially offset by declines in maintenance and term license revenue. A few years ago, introduced SaaS ARR and net retention metrics, provide insight into the rapidly growing SaaS business that is embedded within our subscription revenue line. Today, we are providing more details on the 3 components of our total subscription revenue, one, SaaS revenue; two, subscription services revenue; and three, maintenance and term license revenue. The first two, SaaS and subscription services, represent the go-forward subscription revenue of the company, which was up 22% on a combined basis in FY '23 with SaaS growth of 30% and subscriptions services growth of 2%. The third is our legacy maintenance and term license revenue, which declined by 35% in FY '23. As we have been actively converting those customers to SaaS. You can find the detail for the last 3 years on Page 12 of the Investor Overview deck, that is posted on our website, and we will disclose these components annually going forward. As we look ahead to fiscal '24, it will be another year of transition, and we expect solid growth in SaaS to again be partially offset by declines in maintenance and term licenses. More specifically, we continue to set a goal for SaaS ARR growth of 20% but the comparisons to last year will be very difficult, especially over the first 2 to 3 quarters, where we expect growth rates to be in the mid-teens. For our subscription services business, we noted last quarter that we have seen some slowdown in growth for these offerings, due to the general macro environment, and we would expect flat to low single-digit revenue growth for this segment again next year. Finally, we expect the combination of maintenance and term licenses to decline even more rapidly in FY '24, dropping by more than 50%, as we approach the end of this revenue stream. In summary, for FY '24, we expect total revenue to be in the range of $260 million to $263 million. We expect subscription revenue to be in the range of $193 million to $195 million, representing growth of 6% to 8% and right in line with the preliminary outlook that we provided on our Q3 earnings call. Finally, we expect professional services revenue in the range of $67 million to $68 million, which would be about flat with last year. I would note that Professional Services revenue exceeded our expectations in FY '23, making for a very difficult comparison in FY '24. We expect adjusted EBITDA for the year to be in the range of $48 million to $51 million, representing continued improvement. And finally, for non-GAAP EPS, we expect a range of $1.25 to $1.32 per share, based on a fully diluted share count of approximately 40.1 million shares. For Q1 fiscal 2024, we expect total revenue to be in the range of $61.5 million to $62.5 million, with subscription revenue in the range $46.5 million to $47 million and Professional Services revenue in the range of $15 million to $15.5 million. We expect adjusted EBITDA to be in the range of $8.5 million to $9.5 million. And non-GAAP EPS to be in the range of $0.29 to $0.31 per share, based on a fully diluted share count of approximately 39.2 million shares. Finally, we've also included a midterm view business on Page 16, in the Investor Relations deck. As we look forward a few years and contemplate a normalized business model post transition, we believe that we can return to double-digit total subscription revenue growth, while continuing to improve adjusted EBITDA margins into the mid-20s. While the math is working against us in FY '24, it starts to improve once we get through the downdraft of maintenance and term license. In summary, by maintaining SaaS growth in the 15% to 20% range, slightly improving subscription services growth to the mid-single-digit range and eliminating the year-over-year declines from maintenance and term license revenue, we would expect the blended growth rate for total subscription revenue to be in 10% to 15% range. On the profitability side, we believe we can drive adjusted EBITDA margins into the low to mid-20s by continuing our steady performance and focus on profitable growth. Combining these two elements, we can see a path to a rule of 40 business over the midterm, based on subscription revenue growth and adjusted EBITDA margin. With that, I'll turn call over to the operator for any questions. Operator?
Operator: [Operator Instructions] And you first question comes from Adam Hotchkiss with Goldman Sachs (NYSE:GS).
Adam Hotchkiss: Great. I guess, John, could you just break out the pieces a little bit more for us on the fiscal '24 guidance relative to what you provided us last quarter in your soft guidance, how you're thinking about SaaS ARR. I know you mentioned, there might be a mid-teens growth there in the beginning of the next couple of quarters relative to the 20% you had provided last quarter. And then just any way you're thinking about maintenance and term license and the business services line, relative to last quarter, just breaking down the expectations across those 3 would be really useful.
John Ederer: Yes. Sure, Adam. I think we made some of these comments in the prepared remarks, but maybe I'll just reiterate a few things. I think, first off, in terms of the total subscription number and the growth rate that is right in line with outlook that we provided on the Q3 call. And so, when I look at some of the components of that on the SaaS ARR in particular, we do continue to set a goal for Saas ARR growth of 20%. But the comparisons to last year are going to be pretty challenging, especially over the first 2 to 3 quarters. And so over the first, let's call it, first half to 3 quarters of the year, we would expect growth rates to be in mid-teens. In terms of the other elements, again, we laid those out in the comments as well. So for maintenance and term license revenue, we expect that to decline pretty significantly again in FY '24, probably dropping by more than 50% next year. And then on the subscription services piece, which includes application services and business services, there, we're expecting to see flat to low single-digit growth again next year.
Adam Hotchkiss: Okay. That's really helpful. And then just, Jason, anything you would call out on the regulatory side. I know there are a number of products you've had launched through Rainmaker and have had a number of customer conversations on in relation to recent regulation. Just any updates on how customers are responding to that and how that momentum is going?
Jason Blessing: Yes. So we've got products in market right now to deal with some of the State Price Transparency laws that have been acted over the last 3, 4 years. That is actually -- last year was one of our best-selling products in terms of cross selling into customers. So I think that tells you right there how important State Price Transparency is to customers. We've also just recently or last year released a 340B product called 340B Vigilance, that helps customers deal with that purchasing program and supplying therapies into low-income community. And we've really seen nice pipeline build there and have been working with a couple of our lighthouse customers to continue to enhance the product. So those have been definitely two stars for us that show regulatory is top of mind and then, we just issued a press release if it wasn't yesterday, it was today on our life sciences fall '23 release, and that's going to start to lay some of the groundwork for the Inflation Reduction Act. And the pharma companies that are going to be impacted by that. There's roughly 10 therapies on the first round of focus by the government and virtually all of those therapies are produced by our customers. So we're starting to layer in Inflation Reduction Act functionality as well. So it's a part of every one of our conversations, Adam. It's a great question.
Operator: Your next question comes from the line of Ryan MacDonald with Needham.
Ryan MacDonald: Nice quarter. Jason, I'm curious, as you think about the professional services and the business services side of the business, I'd be curious to see what here -- more about what's contemplated in the growth for next year, particularly as today, another vendor in the space had called out and lowered their guidance based off of sort of less discretionary spending on services from Life Sciences companies, as they look out over the next year. Just curious if you're seeing any impact at all or how much of that sort of contemplated in the updated guidance for '24?
Jason Blessing: Yes. I might have seen that other vendors that you're referencing, Ryan. Yes. I mean as we've talked about the last couple of quarters, so we have a subscription services bucket. And in that bucket is business services and then some enhanced service offerings that we provide to our customers. And I think we talked about in Q2, but especially on the Q3 call. We have seen some macro impact on those two. It's been well published that the emerging biotech and mid-market pharma segment has been impacted by the constricting financial markets and lack of availability to capital. So we see a little bit of impact there in business services, as fewer drugs are approved and fewer companies are looking to scale in market segment. And then certainly on the application services, which is the enhanced services, those are things that companies of all sizes as they're tightening their belts, at times, see as discretionary. So there's a little bit of macro pressure for us, it was in those 2 segments, and it is reflected in the guide that we just provided, as well as our midterm model.
John Ederer: Ryan, this is John. I'll just call a distinction to Professional Services, which is our implementation team. It's a little bit of a different dynamic there. The team has been doing extremely well, over the last couple of years, and they're still carrying quite a bit of project backlog into FY '24. However, with the over-performance in FY '23, it's setting up for some pretty difficult comparisons. And so it will be harder for that piece of the business to grow next year.
Ryan MacDonald: I appreciate that additional color there, John. And maybe as a follow-up for you. Great to see and thanks for providing some of those midterm targets and walking us through some of the math there. Just curious, as we think about the 23% to 26% adjusted EBITDA margin targets in the midterm, can you talk about sort of where you expect across the P&L to get the most leverage? Are you seeing more at the gross margin level, as revenue mix shifts over the next few years? Or how much do you think more you can squeeze out on sort of the OpEx, which already runs pretty efficient?
John Ederer: Yes. No, thank you. Good question. And I would say it's a few areas. So first of all, I think we've just had a very steady and continuous dedication to profitable growth. And so it's part of the culture here, frankly. And so each year, as we set our targets, we aim to drive growth but also drive incremental profit to the bottom line. In terms of some of the areas that we see leverage up and down the P&L. One is on the gross margin line. So there's a few things that help there. One, just becoming a fully dedicated Cloud business and not having to spread our resources across different elements helps us, the revenue mix also helps. So the SaaS portion is more profitable than some of the Subscription Services. And so as that increases as a percent of the total, that helps our gross margins, as well. And then on the operating expense side of things, we've been investing in sales and marketing to drive bookings growth, where we've been able to pick up some leverage is on the R&D side, where we don't have to support as many products out there. And we also see some opportunity for leverage on the G&A line.
Operator: Your next question comes of Craig Hettenbach with Morgan Stanley (NYSE:MS).
Unidentified Analyst: It's McCoy on for Craig. John, as you think about kind of the 2024 guidance. Can you talk about a little bit about how much that assumes new customers versus kind of upsell and cross-sell? And then just on 2024, is there anything we should think about as far as billings throughout the season? I know kind of renewals are coming up in this quarter and maybe in Q1, just anything to think about going forward?
John Ederer: Yes. Of the, I guess, the composition of the overall growth, you kind of hit on them, but the key growth drivers remain largely the same. So we will still have some growth from SaaS transition activity, as well as new logos and cross-sell upsell. Increasingly, we're seeing more and more focus on new logo activity and the cross-sell, upsell. And we've done quite a bit of work internally to get organized around those two opportunities, focusing in on top 100 accounts and really doing quite a bit of work to identify, where the white space opportunities are with our existing customers. And so that's all work that we've been and will continue. And those will be key drivers for FY '24 again. In terms of the billings and some of those cycles, we did see a little bit more variability last year. Particularly with some of the anniversary billings of larger SaaS transition deals. And I would expect we'll see a little bit of that again in FY '24.
Operator: And your next question comes from the line of Rishi Jaluria with RBC.
Rishi Jaluria: First, maybe I want to follow up in terms of thinking about expansions for next year, so I understand with the SaaS NDR, you're starting to kind of taper off some of the benefit from the SaaS transition, you'll still get some next year. How should we be thinking about kind of NDR both next year, as well as maybe longer term, as you get completely through the SaaS transition. And then I've got a quick follow-up.
John Ederer: Sure. I'll start with that one. So it's interesting when we first introduced this metric, we talked about a range for net retention in the 110% to 115% range. And then we proceeded to beat that, I think each quarter. We have gotten benefit over the last year from SaaS transitions. And so as you've seen our SaaS ARR growth rate ramp up and then come back down to the target, our net retention metric has done the same thing. If I think longer term and look at a 15% to 20% target rate for SaaS revenue. In that scenario, I would expect net retention to be in the mid-teens with maybe the remaining 5 points of growth coming from new logo activity.
Rishi Jaluria: Got it. That's helpful. And then I would love to touch on kind of cash flow. I mean you're showing EBITDA margins continue to expand. How should we be thinking about cash conversion over time? And maybe kind of bridging that delta between adjusted EBITDA and free cash flow?
John Ederer: Yes. No, it's a good question. And I would say that, the cash flow relative to adjusted EBITDA was a little bit off in fiscal '23. If you look at our accounts receivable and our DSO metric, it actually crept up a little bit year-over-year. A big piece of that, unfortunately, was a receivable, a large receivable that came in on October 2, instead of September 30. So that would have changed the results for us, DSO and free cash flow. Having said that, I think when we look forward, we would expect cash flow to be closer to adjusted EBITDA. There's really not much below that in capital expense, we do somewhere in the neighborhood of $1 million a year in capital expense. And so your adjusted EBITDA should trend to free cash flow over time.
Operator: Your next question comes from the line of Nick Mattiacci with Craig-Hallum.
Nick Mattiacci: This is Nick on for Chad Bennett. So Jason, it would be great if you could just talk a little bit about your of Model N's opportunity internationally. Can you just talk about what needs to happen outside of the U.S. to capture this opportunity? And if there's anything fundamentally different about those markets, maybe from a compliance or regulatory standpoint? Or is it more about just getting the right sales and marketing infrastructure in place?
Jason Blessing: A little bit of everything you touched on, Nick. So first of all, U.S. market and how pharma companies are regulated is unique. It's really the only market in the world that has this level of complexity and government involvement. As we look in Europe, as an example, a lot of pharma products are bought through Central Health Ministry and through a tendering process, basically in auction. The pricing in Europe is also a little bit different in the countries will negotiate agreements pharma companies, where the price they're willing to pay might be the average of, call it, 5 countries that look like them. So that are similar GDP and similar state of advancement in their healthcare systems. So how they're bought, how they're priced are different. And we actually do have 2 products that are -- I would describe as functionally complete global price management that helps manage all of the complex reference pricing, the country-based pricing that I described. And then a product that is bespoke vertically tailored for pharma procurement and plugging into the pharma specific tender sites. So we have great products. And we have over the last couple of years, we've talked about this, started to selectively invest in our team in Europe, in terms of sales capacity, solution consulting and some professional services and even some product people in theater. It's been a measured investment, but we do see those products, as being strong products that, that team sells. And that team also collaborates with our global account teams that might be servicing a U.S. headquartered pharma company with operations in in Europe. So yes, I'm excited about Europe. I'm excited about our products there, and we've got a small but mighty team in that theater of operation. And as we continue to move forward, I see us continuing to selectively invest there.
Nick Mattiacci: Got it. And then just any comments on what you're seeing in the high-tech vertical. Just as far as deal activity, either new logo or expansion, just how is that performing relative to your expectations? And any macro impacts to call out for that vertical?
Jason Blessing: Yes. I mean as we've talked about kind of widening the aperture over the last couple of years between COVID and supply chain issues, and then rising inflation -- or excuse me, rising interest rates to combat inflation, we have seen some pressure, and we've talked about that in that segment. That said, when I look at our existing customer in high-tech, their market leaders and market leaders, will often invest in projects that have tangible top line and bottom line results and our products do that. So we've seen our customer base thoughtfully invest over the last couple of years. I think what's been encouraging to me this year is we've started to see a pickup in new logo in our pipeline. We had nice attendance from high-tech at Rainmaker, and we saw that event have a really nice impact on frankly, new logo, both life sciences and high tech. So as we come into our fiscal '24, I am pretty excited about new logo in general. It's been encouraging to see a pickup in the green shoots in high-tech as well.
Operator: Your next question comes from the line of Matt VanVliet with BTIG.
Matt VanVliet: I guess as you get pretty far here in the SaaS transition, but go to sort of sell back into the existing base. Are you -- do you feel like you're experiencing any kind of fatigue from some of those customers that have gone a pretty arduous process to move to the Cloud, maybe holding off on any expansion or upsell opportunities there? Maybe just generally, how would you look at the pipeline for the cross-sell activity over the next couple of quarters?
Jason Blessing: That's a really good question, Matt. We've seen a little bit of both to be perfectly honest. We've seen customers. I've talked about some of these examples on earnings calls, where they'll take new products as a part of their SaaS transition. And so that's worked well for us. We certainly have over the last year. I mean, in some respects, we've had so many our customers actually going through projects. They've been potentially slower to take new products in a steady state. And for me, that's why I'm so excited about effectively wrapping up SaaS transitions in the next couple of quarters because that basically gives our entire customer base back to us and allows us to go sell to new divisions, sell to new geographies and sell into the white space, both products that we are building today and products that are on the shelf and ready to go. So I think it's an insightful question, and I'm really excited about, as I described it, getting customer base back and not having to compete with SaaS transition and really bring some of this new innovation and the new products to our customers, where I know they're going to see great value.
Matt VanVliet: All right. Very helpful. And then in terms of over-all head count. I guess 2 parts there. One, on the go-to-market team, do you feel like you need to fill in any spaces there or add capacity in certain areas. And then secondarily, as you sort of wind down on the SaaS transition on the R&D side, can you sort of migrate some of those support type people into more forward leaning type role and how you can leverage that moving forward?
Jason Blessing: Yes, that's a great question. I'll take that one as well. So we've continued to hold sales and marketing as revenue has been growing at about 16%. And so implied in that is over the last couple of years, we have continued to feather in new head count on the go-to-market side. The focus early on, particularly given COVID, and the SaaS transition initiatives, that we had that early on, the focus really was on hiring in the customer base. I think that's what's allowed us to drive SaaS transitions and cross sell nicely over the last couple of years. Starting last year, early in the year, we started to rotate our bias on hiring more towards New Logo. And I'm excited about that. I mean we exit the year with New Logo team that's really ramped. And I think it's a very capable team. We took advantage, I would say, of a buyer's market on talent and got some really, really good folks into that theme. So I would say, as we sit here today, we properly resource on go to market. And then the second part of your question is also a great one on engineering. And we've essentially been flat, flattish on engineering. But yet, we've been supporting SaaS transitions, seasonal releases and also building new products and releasing new products. And so all of that capacity and our ability to do 2 seasonal releases a year, as well as build a couple of new products a year, is coming almost exclusively from repurposing engineering capacity that was supporting legacy on-prem code lines historically.
Operator: [Operator Instructions] Your next question comes from the line of Samad Samana with Jefferies.
Billy Fitzsimmons: This is actually Billy Fitzsimmons on for Samad. Maybe taking a step back and going big picture again. In the prepared remarks, you discussed macro impacts. I know last quarter it was discussed how macro factors have elongated sales cycles. And now that we're kind of a good way through earnings season, we've heard from a lot of companies that some of them have called out that macro factors incrementally worsened in the third calendar quarter or your fiscal fourth quarter. So curious for your thoughts there, if anything, incrementally has changed for you. And what I'm trying to get at, is we've had a couple of companies call it deteriorated macro factors and a lot of them are for different reasons. So some are seeing SMB weakness, some out specific verticals got weaker. Some are seeing lower new logo activity, some are seeing a long-gate sales cycles and Model N is obviously enterprise-oriented company with very specific verticals. So trying you guys a sense of those things. If by chance changes have been incrementally minimal, then just be curious if you can comment on what you're seeing or hearing from your largest customers in the current macro environment in recent weeks and months.
Jason Blessing: Yes. It's a good question, Billy. So if I reflect back on the year, we talked a little bit about macro headwinds in Q2, especially on some of the things that could be potentially perceived as discretionary and followed that up with a similar trend in Q3, where again, discretionary spend was getting a little more scrutiny, potentially not making the cut on budgets. But on Q3, our Q3 call. If I remember correctly, I talked about -- I didn't think things had deteriorated, as we've gone from Q2 -- Q1 to Q2 to Q3. And as we sit here today, I would say the same thing. And I think part of that is that we are a vertical company, big pharma, which is -- you asked about our largest customers, they're continuing to invest. We've got lots of projects going on with big customers right now, as you can see in our professional services revenue and margin. So yes, that part of the market, which is ultimately our core constituent, seems to be pretty healthy. As I talked about in response to the last question, to be seeing a little bit of a pickup in high-tech, as our existing customers that are market leaders are investing. And we did see a nice group of prospects in high-tech attend Rainmaker and those deals have continued to progress forward in the pipeline. So yes, I mean we have seen some of these trends that others have reported. But I think it's stabilized, certainly in our business, as we look forward into our fiscal '24, I'm pretty excited about it.
Billy Fitzsimmons: Great. And if I could sneak in one more. Looking at the press release, you guys highlighted a couple of new product releases and enhancements, how should we think about the path to monetizing some of these newer solutions in the quarters and years ahead?
Jason Blessing: Yes. So I mean, there's a few new products in there, 340B is a product that's actually in the market that we've been working with existing customers to enhance and further develop. And as I talked about in response to one of the questions earlier, in terms of pipeline and interest, that one has been a star for us this year. We're still trying to fully assess the impact of the Inflation Reduction Act, but, that's another one where it drives people to our door because they know eventually they're going to have to be compliant. So that certainly drives demand for us. And then the Channel Collaboration Portal that we talked about on the high-tech side is definitely front and center for a lot of our customers and prospects. So the response to those releases and not just the new products that we've built there. But over the last year and the things that are on our road map, people are really excited about it. I think coming out of Rainmaker, one of the consistent things I heard from our customer is it's great to see Model N coming out on the other side of SaaS transitions really being able to work with us and partner with us to build new products and innovate. So I'm excited about the roadmap and some of the things we're hearing customers on these new products.
Operator: Your next question comes from the line of Brian Peterson with Raymond James.
Johnathan McCary: This is Johnathan McCary on for Brian. So I think just kind of related to that last question. Thinking about the Inflation Reduction Act, it's obviously seeking legislation. I'm just trying to -- maybe you can help me understand, are you expecting like any SKUs to come out of that regulation? Or is that simply additional functionality, just kind of integrating the existing platform and when customers come to you kind of come in the door like you just suggested there? And then how soon do you think that could be a meaningful contributor to revenue?
Jason Blessing: Well, for now, so at least as we understand the Inflation Reduction Act now and how we think it's going implemented. It's going to be major enhancements to core Model N functionality. And in the latest release that shipped, we made some pretty major changes to the product data model to contemplate some of the new data fields, that we have to track. The thing that's still being worked out is exactly how the negotiations between the government and the manufacturer is going to work and how some of the calculations going to work. And it's our belief right now that that's probably just further enhancements to our core calculation engine and some of the existing functionality. What we have certainly seen, in terms of a catalyst with the Inflation Reduction Act is, it has been driving our largest customers to get to the cloud and get current because that's -- as you see with this latest release, where we're implementing the new functionality to address this compliance issue. The first version of the Inflation Reduction Act is really going to be targeted as therapies that are top 10 sellers maybe 20 sellers in the U.S. And so those, by definition, tend to be some of the larger pharma companies, but I think the industry views this as just a start, and it's eventually going to be much more wide sweeping -- wide ranging, excuse me, which definitely drives overall demand for us.
Operator: Your next question comes from the line of Patrick Walravens with JMP Securities.
Patrick Walravens: Great -- and it's really great that you're getting to the end of this transition, Jason, -- so overall, you described the quarter as being strong. I'm just trying to -- I mean I realize there's a ton of things going on. But from a sales attainment point of view, this quarter, was it strong? Or the sales force production meet your expectations?
Jason Blessing: It did. We had a good quarter overall, especially relative to the full year, and we saw a nice contribution from a combination of new logos, cross-sell, upsell, as well as closing some of these SaaS transitions to end out the year. So yes, I was happy with how the team ended the year.
Patrick Walravens: Okay. Great. Great. And then, John, maybe for you because I'm just getting this question. And so yes, if the sales team can was good, why is the -- why were building an RPO below, what people were expecting? What's the dynamic there?
John Ederer: So I guess it's hard for me to speak to some of the expectations that might have been out there and what we're models. But if you look at our total RPO...
Patrick Walravens: I mean just the consensus.
John Ederer: Yes. So if you look at those, they did move up sequentially, and that would reflect some of the sales activity that Jason just described. When you look at it on a year-over-year basis, you are facing some more difficult comparisons due to some of the SaaS transition activity that occurred at the end of last year.
Patrick Walravens: Okay. And then you mentioned in your script, $2 million this quarter and then $1 million next quarter of expenses related to the corporate development initiative? I mean it's a lot of money. So what can you tell us about this?
John Ederer: Well, unfortunately, there's not a whole lot more that we're willing to disclose on that, but we did want to call it out just in terms of the variance to Q4 guidance, as well as, providing some context around where the Q1 guidance stands for adjusted EBITDA in particular. So unfortunately, there's not a whole lot more that we can talk about on that one.
Operator: And there are no further questions. I'll turn the call back to Jason Blessing for closing remarks. Thank you very much.
Jason Blessing: Thank you, operator, and thank you, everyone, for joining us today. I'd like to once again thank our employees for their hard work and solid execution, which is clearly illustrated by performance in Q4. I'd also like to thank our customers who really value your partnership and are looking forward to this post SaaS transition world, where we can innovate together. And again, thank you to everyone for joining us today. Have a great night.
Operator: And that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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