MODN - Model N: A Resilient Growth Story In Revenue Management Solutions

2023-10-16 01:10:21 ET

Summary

• I am positive about Model N due to its strong performance in revenue management solutions for life sciences and high-tech companies.
• MODN has consistently achieved double-digit revenue growth rates and a positive EBITDA trajectory, demonstrating resilience and robustness.
• The company's successful transition to a SaaS business model and alignment with industry growth projections solidify its position as a promising investment.

Investment action

Based on my current outlook and analysis of Model N, Inc. ( MODN ), I recommend a buy rating. MODN, a key player in revenue management solutions, has consistently demonstrated its prowess in catering to life sciences and high-tech companies. Through its innovative cloud-based platform, the company has transformed the revenue lifecycle into a strategic continuum, ensuring maximized revenues in today's volatile market. Their historical performance, marked by impressive revenue growth and a positive EBITDA trajectory, combined with recent earnings, underscores their resilience and robustness. Furthermore, MODN's successful transition to a SaaS business model and its alignment with industry growth projections solidify its position as a promising investment. With its current valuation reflecting its strengths and potential, MODN stands out as a compelling choice.

Basic Information

MODN is a pioneer in the field of revenue management solutions, catering primarily to life sciences and high-tech companies. Established with the vision of transforming the revenue lifecycle from a series of disjointed operations into a strategic end-to-end process, MODN's cloud-based platform ensures that companies can maximize their revenues by addressing the complex challenges they face in today's dynamic market environment. By integrating pricing, contract, and rebate management, MODN provides its clients with a holistic view of their revenue streams, enabling them to make more informed decisions and drive growth. With a commitment to innovation and customer success, MODN has positioned itself as a trusted partner for some of the world's leading brands in their respective industries.

Over the period from 2017 to 2022, MODN has demonstrated remarkable growth in its revenue. It has consistently achieved double-digit revenue growth rates. The average historical revenue growth rate was an impressive 11%, and in 2022, it managed to surpass that by reporting a 13% growth rate.

In terms of adjusted EBITDA, MODN has achieved significant milestones. In 2017, it stood at negative 6%, but by 2022, it had risen to an impressive 15%. Moreover, this wasn't a one-off event, as its adjusted EBITDA has consistently increased over the past six years at a rate of about 2% per year.

Review

In their recent Q3 2023 earnings, the company reported a growth of 13% year-over-year in total revenue, reaching $63.7 million. Their subscription revenue also saw an increase of 13%, amounting to $45.8 million, while their professional services revenue grew by 15%. The adjusted EBITDA for the quarter grew by 35% compared to Q3 of the previous year. The non-GAAP net income stood at $13.6 million, marking an increase of 60% from Q3 of the previous year, and the non-GAAP earnings per share were reported at $0.35. The company's SaaS ARR [Annual Recurring Revenue] grew by 28% year-over-year, and their SaaS Net Dollar Retention was 126%, up three points from Q3 of the previous year.

During the earnings call, CEO Jason Blessing emphasized that the Q3 results surpassed expectations across all metrics. The company not only exceeded its guidance for total revenue, subscription revenue, and professional services revenue but is also nearing the completion of its transition to a SaaS business model. This transition has brought about significant momentum in moving customers to the cloud. CFO John Ederer highlighted the company's robust P&L results in Q3, which exceeded their guidance metrics. The adjusted EBITDA grew 35% compared to Q3 of the previous year. The company is beginning to realize the benefits of its business model transition to the cloud in terms of bottom-line leverage.

In addition, the company mentioned a successful user conference held in June, named Rainmaker . This event saw strong engagement with customers and generated a substantial new pipeline, particularly concerning new logos. There was also significant interest shown in the company's new products and the vision laid out for the future. These factors are expected to drive profitable growth over the next several years, adding a qualitative dimension to Model N's growth story?1?.

The strong performance in Q3, combined with the successful transition to a SaaS business model, positions Model N, Inc. favourably for the future. The consistent growth in subscription revenue and SaaS ARR indicates a growing and recurring customer base, which is a positive sign for future revenue streams. The company's ability to exceed expectations even in uncertain macroeconomic conditions showcases its resilience and adaptability. As the company completes its transition to a fully cloud-based model, it can expect to see further operational efficiencies, reduced support costs, and increased scalability. This, in turn, should lead to improved profitability and the potential for expansion into new markets or verticals. The company's focus on driving SaaS ARR growth, combined with its commitment to profitability, suggests a positive trajectory for both short-term and long-term growth.

Looking ahead, the company's financial outlook for Q4 2023 expects adjusted EBITDA to be in the range of $11 million to $12 million. For the full fiscal year 2023, the total revenue is expected to be between $247.1 million and $248.1 million, with the adjusted EBITDA projected to be in the range of $42.9 billion to $43.9 million. In conclusion, based on the recent earnings, management's outlook, and the company's successful transition to a SaaS business model, MODN presents a promising future outlook.

Valuation

I believe that MODN will grow at a rate of 13% over the next two years, underpinned by several compelling factors. My projection for 2023 aligns with the management's guidance, while my estimate for 2024 slightly exceeds market consensus. This anticipated growth rate for 2024 is grounded in the company's robust historical financial track record. Additionally, MODN's recent earnings results underscore its resilience and robust performance. Most notably, the company has successfully transitioned to a SaaS business model, which is anticipated to yield further operational efficiencies, diminish support costs, and enhance scalability. These developments are poised to bolster profitability and open avenues for expansion into new markets or sectors.

Currently, MODN is trading at approximately 3.5x forward EV/Revenue, while its peers have a median trading multiple of 2.4x. Notably, MODN's positive EBITDA margin of 2.8% surpasses the peer median, which stands at a negative 13%. Additionally, MODN's 2-year expected growth rate aligns with the median of its peers. Taking these factors into account, I consider MODN's current valuation to be justified. I've set a price target for MODN at approximately $26, indicating a potential upside of 10%. Given the aforementioned positive indicators, I recommend a buy rating for MODN.

Risk and final thoughts

One of the pivotal risks underpinning MODN's growth projection is the successful transition to a SaaS business model. The anticipated operational efficiencies, reduced support costs, and enhanced scalability are integral to the company's future profitability and expansion. However, there is a risk if this transition does not yield the anticipated benefits. Challenges in implementation, customer adaptation, or unforeseen operational hurdles could potentially impede the realization of projected efficiencies and growth. If the benefits of the SaaS model do not materialize as expected, it could lead to a re-evaluation of the company's growth prospects and, consequently, its stock valuation.

MODN has established a prominent position within the revenue management solutions sector, mainly targeting the life sciences and high-tech sectors. Their dedication to evolving the revenue lifecycle into a more integrated and strategic framework shines through their advanced cloud-based platform. This tool is adept at addressing the multifaceted challenges of the modern market, providing clients with a comprehensive insight into their revenue dynamics, which in turn facilitates better decision-making and growth.

The resilience and strength of MODN are evident in their recent financial results, especially with the successful shift to a SaaS business model. This transformation is poised to bring about enhanced operational effectiveness, scalability, and potential cost savings in support functions. These improvements are likely to boost profitability and offer opportunities for venturing into new market segments.

Assessing MODN's valuation against its industry counterparts suggests that it's reasonably positioned, especially when considering its positive EBITDA trajectory and growth outlook that mirror industry benchmarks. The historical achievements of MODN, combined with its latest strategic endeavours, underscore its promising position in the industry. Nonetheless, it's essential to remain cognizant of potential challenges, like the full realization of benefits from the SaaS transition. Overall, MODN emerges as a compelling player with a bright future in its domain, and I recommend a buy rating.

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