Value proposition

Model N: Niche equity with a strong value proposition (NYSE: MODN)

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The last few months have given us a rather shocking correction in high-tech stocks. Last year’s stars of the pandemic rally in some cases lost between 50% and 70% of their market value as investors took a risk-averse attitude and shifted capital to safer large-cap games and value stocks.

Value, in other words, finally has its chance to outperform growth. And as we look to 2022, I think that continuing to focus on value while always keeping technology stocks in our portfolios will be the key to outperforming the markets, which I believe will continue to trade choppy throughout the second quarter of next year.

Model N (MODN), in my opinion, is one of the best value-driven tech stocks to invest in right now. For investors new to this stock, Model N is an enterprise software company (and yes, the company is starting to embrace the SaaS mode that Wall Street values) that provides revenue management solutions for science companies. life and technology. And to illustrate where value wins, Model N stocks have lost “only” about 10% of their value over the past month, while many of its peers have grown (the list is too long to name, but think stocks like Peloton (PTON), Twilio (TWLO) and others that have lost around 20% or more of their value since early November) have lost a lot more.

Model N price table
Data by YCharts

The Model N, in my opinion, stands out for its consistency (while not the most exciting title in the tech space, it consistently beats Wall Street expectations and has avoided major unpleasant surprises for years. ) and its niche aspect of serving businesses only in the so-called “innovation economies”. Although technically a niche software vendor, you may be surprised at the size of Model N’s primary customers: the company sells its products to such large and well-known companies as Intel (INTC) and Pfizer. (PFE).

Here’s a reminder of what I see as the main bullish drivers of the Model N:

  • More and more software companies are adopting a vertical playbook. Large portfolio software companies (the two largest are Salesforce.com (CRM) and Oracle (ORCL)) have adopted a strategy of building or acquiring specific clouds vertically in recent years to distinguish themselves from their competitors . Companies in the life sciences and semiconductor industries have specific requirements, and the Model N’s share of mind in this space gives it an edge over more generic software products.
  • Interest in verticalized software may lead to an exit from M&A for the N model. Sitting at such a small market cap, the Model N is the perfect add-on acquisition for a larger software company looking to take the edge in its industries. For example, a few years ago, Salesforce bought a business called Steelbrick for $ 360 million to increase its footprint with its heavy-duty manufacturing customers. These types of acquisitions make sense for a business like Salesforce because it can lead new leads with the specific product vertically, and later sell something else from its large portfolio.
  • Constitution of a subscription base. Model N is becoming a more reliable, SaaS-focused business. During its last quarter, the Model N reached 29% year-over-year growth in subscription revenues, which is quite an incredible achievement for a company with such a low profile and valuation.
  • Client orientation of large caps. Although little known to the average person, Model N’s customer base includes some of the most recognizable companies in the industries it serves.
  • Profitability. The Model N recorded an adjusted EBITDA margin in its mid-teens, which is also an anomaly for software companies of its relatively small size.

Valuation, of course, remains one of the main reasons to stay connected to the Model N. With current stock prices hovering around $ 30, the Model N is trading at a market cap of just $ 1.08 billion, which makes it one of the the smallest publicly traded enterprise software companies. After deducting the $ 165.5 million in cash and $ 124.3 million in debt on Model N’s most recent balance sheet, the company’s bottom line the value of the company is $ 1.04 billion.

Along with its fourth-quarter financial results (which we’ll discuss in more detail in the next section), the N model provided a revenue forecast of $ 211 million to $ 214 million for next year, which is a growth of 9 at 11% year-on-year. Relative to this income estimate, the N model trades at only 4.9x EV / FY22 revenues, an outlier in a software sector that is still expensive despite corrections in many leading stocks.

Figure 1. N model guideGuidance of the model N Source: Fourth quarter results of the N model Release

Net / net, I see the N model as a stock that may not be a “multi-bagger” type of winner, but a “slow and steady” consistent action that represents a way to stay invested in the industry. of technology without overpaying a multiple inflated appraisal. Stay here for a long time – I think the Model N’s merit as a value stock will shine brighter in a more risk-averse 2022.

Download Q4

Now, let’s take a closer look at the highlights of Model N’s latest fiscal fourth quarter results, which the company released in mid-November. The summary of fourth quarter results is presented below:

Figure 2. Results of model N Q4Model N condensed consolidated income statements Source: Model N Q4 profits Release

The Model N increased revenue at a 24% year-on-year pace to $ 51.5 million in the fourth quarter, beating Wall Street expectations of $ 51.0 million (+ 23% year-on-year). The company’s revenue growth also followed the 24% year-on-year growth rate in the last quarter, which in turn accelerated from 21% year-on-year growth in the second quarter. Recall that the acquisition of the company Deloitte Business Services is a major contributor here, which will begin to be compensated during the second fiscal quarter of next year.

Let’s go back to the Model N forecast for FY22, which projects 9-11% year-over-year growth. Part of the reason for this deceleration from current growth levels is due to the acquisition of Deloitte. But it’s also due to the fact that Model N has recently started to focus on shifting its business model to SaaS. As enterprise software investors know, a SaaS transition means that revenue that was once accounted for in initial jackpots is now spread over multiple quarters. In the short term, this will have a downward impact on growth, while benefiting the business in the long term.

Jason Blessing, CEO of Model N, highlighted the significant progress made in the company’s SaaS transition during the fourth quarter earnings call:

Transitioning from an on-premises business model to a SaaS business model as a public enterprise is not an easy or quick process. But we are in good company with many others who have made the transition successfully, resulting in stronger and more sustainable business models. As I reflect on 2021, I am pleased with our overall execution and the progress we have made with our growth levers.

Part of the transition to a SaaS business model is taking care of our customers and moving them forward with us. And last year, we made significant progress on this front. By the end of 2021, we had moved around half of our on-premises customers to the cloud. As I said on previous calls, our transition methodology is finally set and the cost and time to move clients to the cloud continues to decrease, and the quality has been excellent. We also still have a significant amount of future incremental ARRs associated with moving customers to the cloud ahead of us. Many of these remaining deals are with our larger customers, and we expect the impact to our finances to be positive, but potentially irregular on a quarterly basis. The advice John will be providing today envisions closing some of these big deals in 2022, but also infuses some conservatism to give us room to work as it can be difficult to predict the exact quarter these deals will close. “

Basically, the Model N had a blowout in 2021. Compared to 2020, the company reported that deal closings increased 34% year-on-year and the number of new logos added also increased 44% year-on-year. annual. So far, customers who have moved to the SaaS model have demonstrated strong “above 95%” raw retention rates. And net dollar retention rates, which include the benefits of upselling, tend to exceed 110%. These are the kinds of metrics that I believe can help spur an expansion of multiples for the Model N in 2022, with investors focusing more on how the company’s SaaS evolves.

Profitability has been another strong point for the Model N, despite its ongoing SaaS transition and integration of a major acquisition (both typically put downward pressure on profitability). Full-year adjusted EBITDA of $ 26.0 million increased 22% year-over-year and reached a margin of 13.5%, from 13.3% the previous year.

Figure 3. Adjusted EBITDA of the N modelModel N Reconciliation of GAAP Net Loss to Adjusted EBITDASource: Model N Q4 profits Release

Model N’s adjusted EBITDA margin in mid-teens, along with favorable winds from an ongoing SaaS transition, will be the stock’s main upside drivers and differentiators in 2022.

Key points to remember

The N model benefits from a very compelling valuation profile, a strong grip on a niche market sector with dozens of blue chip customers, positive adjusted EBITDA and steady growth coupled with an ongoing SaaS transition. Successful SaaS transitions have historically led to strong rallies in the software industry, and I believe the Model N has long been a neglected software stock that will fare better in a risk-free market environment in 2022. Stay a long time here.