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Why Is Model N (MODN) Up 9.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Model N (MODN). Shares have added about 9.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Model N due for a pullback? 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 catalysts.

Model N Q2 Earnings Beat Estimates on Solid Revenues

Model N delivered impressive second-quarter fiscal 2023 results, with the bottom and the top line beating the respective Zacks Consensus Estimate. The San Mateo, CA-based company recorded higher revenues year over year, driven by solid momentum in Subscription induced by rising demand for cloud-based solutions and growth in Professional services. SaaS ARR (annual recurring revenue) increased 40% year over year.

Net Income

The company recorded a GAAP loss of $33.3 million or a loss of 88 cents per share compared with a loss of $8 million or a loss of 22 cents per share in the prior-year quarter. In spite of the top-line growth, increased operating expenses and loss on debt extinguishment led to higher loss in the quarter.

Non-GAAP net income rose to $8.6 million or 22 cents per share from $5 million or 14 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 5 cents.

Revenues

Quarterly revenues stood at $62.6 million, up from $53.3 million reported in the prior-year quarter. The 18% year-over-year improvement can be attributed to healthy net sales growth in all the business verticals. The top line beat the Zacks Consensus Estimate of $59 million.

Revenues from subscription increased to $44.9 million, up 17% from $38.2 million reported in the year-ago quarter. Increase in SaaS revenues, induced by the growing adoption of the company’s cloud solutions, supported net sales in this segment. However, this positive trend was partially reversed by declining maintenance revenues. SaaS net dollar retention increased to 138% from 116% year over year. In the second quarter, the company generated $17.7 million in revenues from Professional Services. Increase in number of professional service hours performed led to an 18% year-over-year growth from this vertical.

Other Details

Total operating expenses reported in the quarter was $38.1 million, up 15% from $33.1 million in the year-ago quarter, owing to increase in employee-related costs and equipment-related expenses. Non-GAAP gross margin was 60%, in line with the prior-year quarter’s figure.

Adjusted EBITDA was $9.2 million, up from $6.6 million in the prior-year quarter. Non-GAAP operating income was $9 million, up 40% year over year.

Cash Flow & Liquidity

In the second quarter of fiscal 2023, Model N generated $12.1 million from operating activities compared with $12.6 million of cash generation in the year-ago quarter. As of Mar 31, 2023, the company had $270.6 million in cash and cash equivalents with $279.5 million of long-term debt.

Outlook

For third-quarter fiscal 2023, the company expects total revenues between $61.5 million and $62.5million. Subscription revenues are projected in the range of $45-$45.5 million. Adjusted EBITDA is expected to be between $9.5 million and $10.5 million. Non-GAAP operating income is expected within $9.2-$10.2 million, while non-GAAP earnings per share are estimated in the band of 23-25 cents.

For fiscal 2023, management raised total revenue expectations in the band of $244-$246 million, up from $242-$245million projected earlier. Subscription revenues are estimated in the range of $180-$181 million. Adjusted EBITDA is projected within $39-$41 million. Non-GAAP operating income is expected within $37-$39 million. Non-GAAP earnings are expected to be 94-99 cents per share.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -254.55% due to these changes.

VGM Scores

Currently, Model N has a strong 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Model N has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Model N belongs to the Zacks Internet - Software industry. Another stock from the same industry, Snap (SNAP), has gained 17.1% over the past month. More than a month has passed since the company reported results for the quarter ended March 2023.

Snap reported revenues of $988.61 million in the last reported quarter, representing a year-over-year change of -7%. EPS of $0.01 for the same period compares with -$0.02 a year ago.

Snap is expected to post a loss of $0.05 per share for the current quarter, representing a year-over-year change of -150%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.5%.

Snap has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.

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