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Why Is Model N (MODN) Down 4.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Model N (MODN). Shares have lost about 4.2% 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 Q2 Earnings & Revenues Beat Estimates

Model N, Inc. reported second-quarter fiscal 2021 non-GAAP earnings of 4 cents per share, which surpassed the Zacks Consensus Estimate of loss of 5 cents. However, the bottom line declined 43% year over year.

Revenues were $48.2 million, which beat the Zacks Consensus Estimate by 3.8% and increased 21% year over year.

Robust adoption of the company’s revenue management solutions drove fiscal second-quarter top line. Model N’s Revenue Cloud aids organizations with enhanced efficiency, visibility and transparency in reporting. The acquisition of Deloitte’s Business Services unit also added $6.5 million to the top line.

Quarter Details & Business Highlights

Model N reports earnings under two business lines — Subscription and Professional Services.

In second-quarter fiscal 2021, Subscription revenues (74.6% of total fiscal second-quarter revenues) were $35.9 million, up 24% year over year.

Professional Services revenues (25.4%) increased 12% on a year-over-year basis to $12.3 million.

The company is making steady progress in its transformation to a Software-as-a-Service (SaaS) based model, which is driving the top line. Model N announced that Novartis moved forward with their plans to transition to Model Revenue Cloud for Life Sciences in the quarter under review.

In the fiscal second quarter, European division of a global biotech company went live with Model N’s solutions, including global pricing management and international reference pricing solutions. In the high-tech vertical, Targus selected Model N Revenue Cloud for High Tech. Targus is engaged in designing innovative mobile computing accessories.

Operating Details

Non-GAAP gross margin contracted 500 basis points (bps) from the year-ago quarter’s figure to 57% mainly due to negative impact from buyout of Deloitte’s Business Services unit.

Non-GAAP subscription gross margin contracted 600 bps from the prior-year quarter’s levels to 66%. Non-GAAP Professional services gross margin contracted 600 bps from the year-ago quarter’s figure to 29%.

Adjusted EBITDA during the quarter was $3.2 million, down 0.2% year over year.

Non-GAAP operating income was $3 million, in line with the year-ago quarter’s levels. Non-GAAP operating margin (as a percentage of total revenues) contracted 130 bps to 6.3%.

Balance Sheet

As of Mar 31, 2021, Model N had cash and cash equivalents of $148.3 million compared with $143.5 million as of Dec 31, 2020. As of Mar 31, 2021, the company had long-term debt of $119.2 million compared with $116.8 million reported as of Dec 31, 2020.

In the quarter under review, net cash provided by operating activities was $3.4 million compared with $0.2 million of net cash used in operating activities in the prior quarter. Free cash flow was $2.9 million for the fiscal second quarter compared with free cash outflow of $0.6 million in the previous quarter.

Guidance

The company anticipates fiscal third-quarter 2021 total revenues between $48.5 million and $49 million. For third-quarter fiscal 2021, subscription revenues are projected in the range of $35.5-$36 million.

Adjusted EBITDA is expected between $2 million and $2.5 million. Non-GAAP income from operations is expected in the range of $1.8-$2.3 million. Non-GAAP earnings per share is anticipated in the range of 1-2 cents per share.

For fiscal 2021, Model N raised its guidance. The company now expects total revenues in the range of $189-$190 million compared with the previous guidance of $184-$186 million. Fiscal 2021 subscription revenues are now forecast in the range of $139-$140 million compared with the previous guidance of $136- $138 million.

Non-GAAP operating income is expected in the range of $13.7-$14.7 million compared with earlier projected range of $9.5 -$11.5 million. Adjusted EBITDA is now projected in the band of $14.5-15.5 million compared with previous guidance of $10-12 million. Non-GAAP earnings are expected to be 21-24 cents per share versus earlier guidance of 10-15 cents per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted -21.74% due to these changes.

VGM Scores

At this time, Model N has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Model N has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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