All right, good morning. Welcome to day two of the 2024 Citizens JMP Technology Conference. I'm Aaron Kimson, a VP on the Software Equity Research Team here at Citizens JMP. We're really excited to have Model N CFO John Ederer with us on stage today for a fireside chat. John, thanks for being here, and how are you doing? Absolutely. Thanks very much for having us. We always enjoy this event. It's a good one. Awesome. So first question I want to start off with, maybe a little bit of a softball. You noted a couple big customer wins on your 4Q earnings call in February with Bayer Pharmaceuticals on the life sciences side and TSMC on the high-tech side. Can you walk us through the process for each? Were they competitive? What were these customers using before, and why did Model N win? Yeah, no, thanks for the question. So yeah, on our December call, those were a couple of the new logo wins that we announced, and terrific new wins for us. On the high-tech side with Taiwan Semiconductor, good situation there where they brought us in for the Revenue Cloud as well as Channel Data Management, and it's a great entry point for us with a solid customer. And we've generally had good strength in the semiconductor space, and I think that helped tip the scales in our favor there. With Bayer, another great win as well, and that was a top 20 pharmaceutical customer, one of the few that was not a customer with Model N. And that was an interesting situation. That was a deal where it was also competitive with more of a horizontal software provider. Previously, they had been using their ERP system, kind of leveraging what they had with SAP. They had some pre-built or custom-built internal software that they were using, as well as just some kind of brute force, manual effort to manage these processes. And so it was a unique situation to see a top 20 pharma still trying to cobble this together and do it in-house. We were part of a broader business transformation for them, digital transformation, and now we will manage all of that on their behalf in our cloud. And so that was a great new logo for us in Q1. Yeah, that's a great color. Then maybe shifting the cloud transition, so can you talk about the visibility you have for the remaining customers that still need to fully transition? Are there things looking back on it over the past few years that you would have done differently during the transition? Yeah, I mean, I think looking back, I guess you always wish it could go faster. That's maybe the biggest thing. Certainly, there was urgency on our part, but it's sometimes hard to get the customers through all of those hurdles on the timeline that we would like. Nonetheless, we've made incredible progress. As of September, which is our fiscal year-end, we were about 85% of the way there with our life sciences customers. We did have an end-of-life for on-premise support in December of 2023, and so we've started to put the pressure on those that are remaining. We're actively engaged with the folks that are left, and we do believe that we'll get them across by the end of this fiscal year, so September 2024. It's been good. I think that for the customers that have made it across, they've seen a lot of positive benefit. For one, it's a modern platform, and so there are just operating efficiencies that come with that in compute time and other things. They don't have to go through lengthy upgrade cycles anymore. That was part of the on-premise world where every few years, if you wanted to get onto the next iteration of the technology, you had to go through a pretty hefty project to get upgraded. You don't have to do that anymore. Now, like any kind of new innovation and regulatory updates that come from us, those are all automatic and part of the cloud platform. So there's a lot of benefits to the customers, and I think by and large, they've been very happy to make the transition. There's also benefits to us. Frankly, moving those large customers across is akin to a new logo win. Once we've gotten the customer moved over to the cloud, that opens up the cross-sell, upsell opportunity for us and unlocks the next part of the model for us. Got it. And then maybe with some of the customers, the few who have been a little bit slower at the end here, can you talk about any types of concessions that you're offering them to move to the cloud, the carrot and the stick? You've talked about it over the years. You know, I wouldn't say there's anything different, honestly. And so with all of these deals, to be perfectly candid, they've been custom deals. And you've got a customer that knows Model N already, and they're transitioning from an old platform to our cloud platform, and all of these have been pretty heavily negotiated deals. And frankly, a lot of them have been larger transactions. And so I wouldn't say there's anything really different with the final cohort here other than timing. And it's just, like I alluded to this earlier, we would like to go faster. We would have liked to have done all this years ago. The reality is that the customer needs to be ready to go. They need to have their budgets lined up. They need to have their project team lined up. They may have to feather us in depending on what other IT projects they have ongoing. And so a lot of it does just kind of come down to timing. Got it. And then I think the ultimate measure of the cloud transition is kind of TBD, right? Can you upsell these customers when they come up for renewals? So can you walk us through what you're seeing with cloud customers that have renewed, if any have started to renew yet, when your biggest renewal cohorts come up, and how confident you are in your ability to upsell? Yeah, so our renewal, or I guess when we look at retention, so gross retention I think is very high. So we've been in the mid-90s% from a gross retention standpoint on our SaaS product. And even if you kind of step back from just the metric and you think about our relationship with the customers, it's really more of a partnership in a lot of ways. And I know that sounds a little bit like a cliché, but I mean, just by definition, the customers that have done SaaS transitions are over five years old. We haven't sold perpetual software in five-plus years. And so these are customers that have been with us for a long, long time. When they sign SaaS transition deals, I would say the shortest is probably a three-year deal. We've had some that are seven years. And so they are, by and large, re-upping for a significant period of time with Model N. And so that's why I say it's really more of a partnership. We work very closely with them in terms of our product roadmap. And for each individual customer, they do a SaaS transition, and then there's often a roadmap of the next several projects that come behind that. And so I think we work very closely with them, and I expect that we will continue to do so. Yeah, I think that's a good segue. You touched on it a little bit here with product development in the cloud, right? So you're co-developing products with your customers, like you said. Can you talk about the benefits there for each party and how investors should think about future co-development efforts after you get through the transition? Yeah, so I would say part of our, I guess, our strategy and our operating philosophy, and it kind of comes out of the partnerships that we have with these customers, but we work very closely with them on our product roadmap. And so we have Customer Advisory Boards on both the life sciences and the high-tech side that meet regularly each year, a couple times each year, actually. And we collaborate with them on the roadmap. And so we often introduce new products with existing customers. To give you an example, State Price Transparency Management was one that we developed with Pfizer. And this was a situation where the regulatory environment changed. States started to implement their own price transparency regulations. We got up to about half of the states with their own regulations, and Pfizer came to us and said, "Hey, this is becoming a real headache. What can we do about this together?" And we co-developed a product with them. They became our first customer, our first reference customer, and then we were often running, selling it to other folks. And so we get opportunities to collaborate like that with our customers, which I think is unique. We've got a couple of products coming out a little bit later this year on the data and analytics side. And again, we've got customers, design partners for all of those products through our CAB, so. Got it. And then let's maybe transition to the numbers a little bit here. So what's the right way to think about the relative growth rates of the life sciences piece of the business? It's 85% of your revenue, and then the high-tech side, that's the other 15%. Yeah, you know it's interesting. They've actually been pretty comparable. So if you look at the split, the revenue split between life sciences and high-tech, it's been pretty consistent. So it had been running at about 80/20 life sciences to high-tech. We did the acquisition of the Deloitte Business Services Group three years ago. That shifted the mix to 85/15, but it's remained relatively consistent. And so I would say that high-tech is keeping pace with life sciences. Does the success that some of your high-tech customers are seeing in their own businesses right now present an incremental revenue opportunity, perhaps? Potentially, yes. So the high-tech side of our business has actually rebounded a little bit here post-pandemic. So if we go back several years ago, during the pandemic period, we did see pipeline fall off on the high-tech side. And so that part of our business was impacted a little bit more as opposed to the life sciences, which was a very momentary blip in the kind of March 2020 time frame. And then everything settled right back in, and the life sciences companies continued on. But high-tech did take a little bit more of a hit and then subsequently rebounded, and we've seen a little bit more strength out of that side of the business more recently. To your question about, as those companies grow and expand, does that mean potential more upsell revenue for us? And the answer is yes. And so when we price just at a very high level, there's two vectors. So one is the, and this is for both the life sciences and high-tech, but there's two vectors. One is the products, the features, functionality that you're buying. The other is a volume component. We don't use seats because that's not really relevant for our business, but we do look at revenue under management as a proxy for transaction volume and what we expect to flow through our system, and we charge accordingly. And so oftentimes in our contracts, we'll have either revenue bands or transaction volume bands. And so if a customer moves up into that next tier, then there'll be an upsell for that. Yeah, that's great cohort. And then what's the right way to think about the mix of services revenue versus SaaS revenue once the cloud transition is complete? Yeah, so just to clarify for everybody, there's a few different components to our revenue. At the top level, the P&L, there is subscription revenue and then professional services revenue. That professional services piece is kind of the time and materials implementation revenue. The rough split is kind of 75/25 today between subscription and professional services. Within our subscription line, we have two pieces that will be the ongoing business. The first is SaaS, which is the majority of our subscription today. It's approaching 70% of the total subscription line. The second ongoing piece are what we call subscription services. These are services where we've taken professionals, we've wrapped them around our software, and we deliver that as a holistic solution. It's analogous to an outsourcing model where if the customer isn't able to manage and operate the software and the revenue management program on their own, they can outsource it to us, and we'll run it for them on top of our software. So that is a subscription business. We'll sell that at least on an annual contract basis. We'll bill upfront and recognize it ratably. So that's part of our subscription line as well. That kind of makes up the, well, there's a third piece today, which is the maintenance, which is coming out, but that subscription service is about 20%-25% of the subscription, and the SaaS is about 70%. Can you just talk about the net effect on your SaaS gross margins between those two components of the subscription revenue? Yeah, so that's actually an important concept. So from a gross margin standpoint, if you look at our total subscription gross margin, it's been in the high 60s% on a non-GAAP basis. And that reflects a mix of SaaS, which has been in the high 70s%, and the subscription services, which has been lower. And so that blended mix gets you to about high 60%. That's very helpful. Then you have a really efficient professional services organization. One question, I guess, how's a company able to run its professional service business with such high margins? And how should investors think about professional service margin as the cloud transition comes towards the end? Yeah, no, it's a good question. I have to be honest, I've been a little surprised by our margins as well. And I used to comment on this on the calls, and then the first time that we hit 40%+ on professional services gross margin, and I made the comment that this was great, but I didn't think it was sustainable. And then the team did it again, and then they did it again. So I stopped commenting on it. But I still ultimately think it's not really sustainable. You don't typically see margins that high for an implementation business. I mean, frankly, if you get to 30%, you're doing great, and at 35%, you're world-class. And I've not seen 40% in my career. I will tell you that we do have a unique position. Part of the reason that we're able to do this is the domain expertise that our team has. So when it comes to implementing our software and really having the knowledge of how this process works within the company is a huge advantage. So I think that does give us a little bit of pricing power. And if I'm being honest, we have gotten benefit from SaaS transition activity. A lot of those deals are big deals. They're big services engagements. On average, they can be 6-9, maybe 12-month projects. So we have benefited from that as well. Yep, and then I guess, turning to more of the bottom line here. What are the key levers for margin expansion? Is there a certain cadence you expect to fall into for annual margin expansion going forward? Yeah, I think that I'll start with, I guess, the conclusion. We can talk about some of the levers as well. So if you look at our Adjusted EBITDA margin over the last couple of years, you'll see that we've been making steady progression from kind of low to mid-teens. Now our guidance would suggest high teens. And so I think we've made good steady progression over the last few years. And I would note that that's even in the midst of a pretty significant business model transition. And so I think we've focused on this. We've made it a priority, and I think we've executed well in terms of continuing to improve that profitability. We put out some midterm targets where we believe we can get to the low to mid-20s, and that will be through continued steady progression on this point. When I think about some of the levers, it's really up and down the P&L. And so starting with the cost of revenue and going towards the gross margins, for each of the subscription pieces, for the SaaS piece, there are things that we're working on specifically around cloud hosting, some things that we can do with more scale. There's some things that we're doing from a technology standpoint that we think can incrementally improve that SaaS gross margin. There's some things that we're doing in terms of the delivery of our subscription service offerings and principally in terms of getting that mix right in terms of onshore and offshore resources where we think we can step up the margins for that line of revenue as well. And then the mix shift helps us. SaaS is growing faster than the subscription services, and so that should help drive overall total subscription gross margin. On the operating side of things, we see opportunities for leverage principally in G&A and R&D. On the G&A side, we did make some investments, but now from an IT perspective, now we feel like we've got the opportunity to kind of grow into that. And so we should pick up leverage as we grow revenue. I don't think we need to increase G&A spend. On the R&D side, it's a little different. So on the R&D side, we still have some effort that goes towards legacy products and even helping customers with SaaS transitions. As we wind down that activity, we're able to shift resources to new product innovation. And so we're getting more new product innovation for relatively the same dollars spent. If you look over the last couple of years, we've already started this trend. Our R&D spending has actually gone up slightly in terms of the total dollars spent, but it's been coming down as a% of revenue the last couple of years. That's another opportunity for leverage just as we complete this business model transition. Got it. On a related note, so just under half of your employees are located in India. Can you help us understand what functions are predominantly there and how to think about the relative growth of headcount in India versus the U.S. going forward? Yeah, so I think we've done a good job with this. A lot of companies have. But to your point, and we've got about 50% of our employees now in India, the primary functions are R&D support. Some of our services organization are the three biggest over there. And then some of our G&A organization. Now our G&A, relatively speaking, is quite a bit smaller than those other organizations. But we've done a nice job of trying to find opportunities to expand in India, and we've built that up over time. And so I think that does benefit us from a cost structure standpoint. I think there's still opportunity. One area in particular that I just alluded to is on the delivery of our subscription services. And so we've got a concentrated effort underway to get more mix in terms of the delivery of business services based in India, which we think will help our overall cost structure for that line. It's interesting. I've been talking to a number of companies about this week, and the common feedback I get is if you do it from the beginning, it's so much easier with offshoring some of your R&D, a lot of your G&A. Was that in Model N's DNA, or has that been kind of a transition that you've had to do over time? Yeah, no, we've been, we certainly started this well before my arrival, and so it's been in our DNA for quite some time. But I do appreciate the comment because I think that it is hard to get started sometimes. And so if I look at even just the delivery of our Business Services Group, that was the piece that we acquired from Deloitte, all based in North America. And there was a lot of, frankly, a lot of resistance to making that move. There was a belief that, no, we couldn't possibly service customers from India. Everybody needs to be here in this time zone, et cetera, et cetera. But the reality is different. The reality is that you can. And so we're driving that transition now, and I think we'll ultimately be situated with a much better cost structure to deliver those kinds of services in the future. That's great. All right, we've got about four minutes left. I'll go ahead and open it up to the audience if anyone has questions. Go ahead. Yeah, so maybe just kind of a more high-level question about Model N's kind of value prop. Do some of these kind of more regulations coming in around life sciences, kind of is that a tailwind behind Model N versus kind of larger ERPs or financials providers? Where is that going, and is that going to be a tailwind to Model N potentially? Yeah, yeah, no, good question. So just to summarize, talking a little bit about regulation, particularly on the life sciences side and how that impacts our business and kind of the core value proposition of Model N. So regulation, I would describe it as kind of that constant macro force that frankly keeps us in business. And you see it in a couple of ways. One, you see it with the retention rates that we have. So we're very sticky because regulations are always changing, and we manage that for the customer. The second thing that it does is it acts as a catalyst. And so, for example, when the Inflation Reduction Act came out and new regulation around the pharmaceutical industry, that acts as a catalyst for folks that maybe aren't with Model N today. There's a little bit of a fear factor and a little bit of the unknown of what's coming and how are we going to manage this and how are we going to handle it. And so that opens up conversations with us. And so that's a great, like I said, catalyst for us to get engaged with a customer. Just in general, an investor actually described it to us this way when we were talking about it once, and I think the analogy hits it right on the head. Health care and pharmaceutical regulation is a lot like the tax code. So new things come on all the time. Nothing ever leaves. So it only gets more and more complex. And we kind of thrive in that complexity. And so for us, it kind of comes back to a two-pronged value prop. One is managing and taming this complexity around compliance. But then the second is helping customers generate additional revenue. And so we can add tremendous value on both of those levers, and I think that's what keeps us entrenched. All right, we got a minute and a half. Should we do competition or RPO? Sure, whichever way you want to go. Let's talk about competition a little bit. So I want to touch on one specific competitor. How does Model N compete with IntegriChain? And have you seen any changes competitively since Nordic Capital acquired the majority share from KKR? Still private equity-owned, but. Yeah, no, I would say I've not seen any changes since their new ownership has come in. So IntegriChain is kind of an interesting situation. They used to be a partner of ours. And then when we bought the Deloitte Business Services Group, they became a little bit more directly competitive with that part of our business. And so that's the part where we are outsourcing the whole solution to the customer. And so it's a part of our business where we can use that to kind of go downstream a little bit. We could even target very early-stage businesses, although we found the sweet spot for us is probably a little bit, still a little bit more upstream. But theoretically, we can offer that solution to pre-commercial businesses and earlier-stage companies that are just launching. And so that's where we would compete with IntegriChain. They're more of a service-oriented approach. From a software perspective, I don't think there's anybody that looks exactly like we do. There are some horizontal providers like a Vistex, for example, that would try to get involved in the life sciences industry, but they just don't have the same depth that we do in the industry vertical. And so that's our differentiation. Awesome. Well, that's a great spot to leave it. Thanks so much for coming out today. Absolutely. Thanks, Aaron. I appreciate it. Yeah, appreciate it.