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Model N (NYSE:MODN)
Q2 2020 Earnings Call
May 05, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings and welcome to the Model N second-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Barter, chief financial officer. Thank you.

Please begin.

David Barter -- Chief Financial Officer & Senior Vice President

Good afternoon. Welcome to the earnings call for Model N's second quarter of fiscal year 2020, which ended on March 31st, 2020. This is David Barter, Model N's chief financial officer. And with me on the call today is Jason Blessing, Model N's chief executive officer.

Our earnings press release was issued after close of market and is posted on our website where this call is being webcast. The primary purpose of today's call is to provide you information regarding our second-quarter performance, and our financial outlook for our third-quarter and full-year fiscal 2020. Commentary made on this call may include forward-looking statements. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date.

We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10-Q filed with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metric are included in the earnings release issued today, which is available on our website. I encourage you to visit our investor relations website at investor.modeln.com to access our second-quarter fiscal year 2020 press release, periodic SEC reports and the webcast replay of this call. Finally, unless otherwise stated, all financial comparisons in this call will be to our results in fiscal year 2019.

With that, let me turn the call over to Jason.

Jason Blessing -- Chief Executive Officer

Thanks, David. Good afternoon and thank you for joining us today. I hope you and your families are doing well and staying safe in these unprecedented times. I'm pleased to share that the Model N family is well.

We shifted our global operations to remote working over seven weeks ago. And we've been able to provide uninterrupted support to our customers, many of which are helping on the front lines fighting the COVID-19 virus. Today marks my second anniversary with Model N. Given this milestone and the current environment, I will focus my remarks in three areas: first, I will share an update on our second-quarter and first-half results and highlight the progress Model N has made over the past two years; second, I will share some details on what we are seeing in our markets and hearing from our customers; and third, I will share some thoughts on our outlook for the second half, including a few applicable learnings from the 2008 recession.

Our Q2 performance is one of our best as a public company, and our first half results illustrate the potential of Model N operating in a healthy economic environment. Total revenue for the quarter was $40 million, an increase of 15% over last year. And subscription revenue was 29 million, a 12% increase over last year. In the second quarter, we also achieved double-digit year-over-year growth across key profitability and cash flow metrics, which allowed us to exit the quarter in the strongest financial position in our history.

When I joined the company, we had so many things going for us. We had a vibrant market opportunity, mission-critical products and a team with strong Life Sciences and High Tech domain expertise. We've built on these strengths, and our focus and our operational rigor has driven consistent execution. In a relatively short time, our results demonstrate how far we have come.

I'd now like to share some quarterly highlights before shifting gears to discuss our response to the COVID-19 pandemic. During the second quarter, Seqirus, a global leader in influenza prevention, selected Model N's Revenue Cloud to drive improved operations in its government and commercial markets. Given the importance of combating the flu neck season, Seqirus wants to make sure its systems are ready to support the business in this dynamic environment. This new logo win is also noteworthy as the implementation will be led by a partner using our Express methodology.

This is a templatized project approach, which incorporates industry-best practices and testing automation to accelerate a customer's time to value. We expect Seqirus to be live later this year and be ready for the flu season. In High Tech, AVX Corporation, a global manufacturer of electronic components that we signed in Q2 of last year, went live with Deal Management, Deal Intelligence and Channel Management. Our integrated pricing, deal negotiation and Channel Management solution will be used by AVX' internal sales teams in North America, as well as in their international distribution channels.

Also in the second quarter, the generics business unit of Mallinckrodt Pharmaceuticals completed their transition to Model N's Revenue Cloud. Using our proven SaaS transition approach, Mallinckrodt was able to seamlessly move to our cloud platform and set a milestone as our fastest SaaS transition to date. They joined the ranks of Gilead Sciences, Biogen, Novo Nordisk and the 70% of our customers who run their business on our Revenue Cloud. Turning to COVID-19.

Our response to the pandemic was swift and effective, which has allowed us to continue to support our customers. As I alluded to earlier, the Model N family is safe and healthy and amazingly resilient. For over seven weeks now, we have been working remotely as a global team and plan to continue to do so through at least the end of May. Customer support continues uninterrupted, and our professional services teams are working remotely on customer projects.

In fact, a few weeks ago, we had a major go live at Novartis, where our teams worked 100% virtually through a successful go-live. Given the scale of this project, it's a first for us and something that we will replicate in the coming months at other customers. We're also virtually kicking off new projects, and the sales team continues to engage with customers and prospects. And finally, product development is busy, working on new features and executing on our road map.

As a team, we miss the comradery that naturally comes from working together in the office, but we're spending a lot of time together on Zoom and are grateful for the opportunity to serve our customers. I'd now like to share some thoughts on how the COVID-19 pandemic is affecting our end markets. Life Sciences companies are in general incredibly busy right now. Biopharmaceutical companies that produce antivirals and respiratory therapies are, not surprisingly, the busiest.

A leading top 10 pharma customer shared that they are actually turning away new customers as they focus on satisfying current demand. Diagnostics testing and medical supply companies are also experiencing record demand. One customer had order volumes increase 50 times month over month in response to demand from the pandemic. Other customers are trending in line with pre-COVID-19 business conditions.

As an example, customers focused on oncology and chronic illnesses seem to be as busy as they were at the start of the year. Companies whose products are considered elective have seen a decline in demand, given that the broader healthcare system is focused on fighting the virus. As a result, some medical device companies have seen their businesses slow down during this period, but are expected to bounce back over the next several months as the taxed healthcare system recovers. The bottom line is we believe Life Sciences will see some disruption in certain pockets, but overall this is a very resilient market.

We are seeing similar trends in our High Tech vertical. Broadly speaking, some companies are seeing growth due to secular trends such as the global 5G network build out, expanding demand for cloud computing, and increasing demand tied to life-saving medical devices. We've also heard from some companies that have high exposure in consumer goods and automotive that their demand is challenged. Like Life Sciences, we believe that High Tech will see some disruption but will be one of the markets that will lead a global economic recovery.

We have significantly less exposure to High Tech as a total percent of our business mix, and we will continue to be thoughtful about selling into the pockets of strength in this market. In response to the current environment, we have also rolled out a package of sales tools and offers designed to help our customers. The steps we are taking now are similar to those I saw work back in 2008. The sales tools include things like flexible payments and escalating deal structures.

We have also designed a set of product offers that our sales and customer success teams are using to drive loyalty with customers and close new deals. One simple example is making our online training library available to all customers to ensure that they are getting maximum value from their current investment. To date, this offer has been very well received. Other offers are geared toward our different sales motions around new logos, SaaS transitions and customer base expansion.

As I was working with the team on our response to the COVID-19 crisis, it led me to reflect on my experience at Taleo and how we dealt with the 2008 financial crisis. I recognize that the current situation is unlike anything we've ever faced. That being said, I believe that there are parallels between Taleo in 2008 and Model N today, and those parallels give me comfort in our ability to adapt to today's situation and continue to grow our business. Like Model N, Taleo was a SaaS company that was built on a philosophy of customer success and profitable growth.

We built a durable business at Taleo, which had a similar scale and financial profile to Model N today, and this put us in a position of strength when the 2008 financial crisis hit. We took advantage of this, and we continued to thoughtfully invest in the business with a focus on things we could control, which allowed us to exit the recession in an even stronger position. Today, Model N is in a similar spot, albeit with more mission-critical products, which we believe positions us to make strategic investments in our business in the coming months and exit this recession as a better company. As a business, we're confident about our long-term future.

The results we saw through the first half of the year and, quite frankly, the results of the last two years are only the beginning for Model N. We will continue to make thoughtful investments and run the business with focus and an emphasis on persistent execution. We have a compelling market opportunity, mission-critical products and a team that knows how to execute and make our customers successful. And finally, we are grateful to our customers who are making a difference fighting the COVID-19 pandemic on the front lines and saving lives.

Now I would like to turn the call over to David to elaborate on our financial results and guidance. David?

David Barter -- Chief Financial Officer & Senior Vice President

Thank you, Jason. Our results for the second quarter of fiscal year 2020 exceeded the financial outlook for all revenue and profitability measures we shared with you last quarter and extended the strong performance we delivered over the last two years. These results are further evidence we are making progress growing and scaling as a vertical SaaS company, while also delivering improved levels of profitability and free cash flow. Total revenue for the second-quarter grew 15% to $40 million.

The outperformance reflects healthy subscription revenue of $29 million, an increase of 12% from a year ago. The growth is a direct result of our strong sales execution, which led to new subscription revenue of $18.7 million, an increase of 33% compared to $14.1 million in Q2 of last year. As highlighted on our last call, this growth was partially offset by a natural decline in our maintenance subscription contracts due to SaaS transitions, which resulted in revenue of $10.3 million, a decrease of 13% compared to $11.8 million in Q2 of last year. Professional services revenue was $11 million for the quarter.

This amount reflects the go-live milestone for a successful SaaS transition. Now I'd like to turn to profitability. Our team executed well in the quarter, and our top line overperformance meaningfully impacted the bottom line, reflecting our commitment to and focus on generating profitable growth. Non-GAAP gross profit for the second quarter was $24.8 million or 62% of total revenue, an increase of 27% from last year.

Non-GAAP gross margin for subscription revenue was 72%. Non-GAAP gross margin for professional services revenue was 35%. Non-GAAP operating profit for the quarter was $3 million. Non-GAAP net income in the second quarter was $2.6 million.

We produced a non-GAAP net income per share of $0.07, which was ahead of our guidance of $0.01 to $0.03. Adjusted EBITDA for the second quarter was $3.2 million, representing a margin of 8%, a meaningful increase from the 5% margin we reported in Q2 of last year. All in all, we believe Q2 was a very well-executed quarter with strong financial results. Moving on to the balance sheet.

We ended the second quarter with $61.3 million of cash and cash equivalents. As a reminder, we repaid $5 million of debt in early January. With this payment, we've repaid fully the seller's note associated with the Revitas acquisition and only a portion of the term loan with Wells Fargo remains. Our cash balance also reflects our healthy free cash flow of more than $8 million in Q2.

Before I discuss our outlook, I'd like to share some perspective on COVID-19. Our business is largely U.S.-based, so we did not see much in the way of impact during Q2. In March, we observed a few changes. One, it looks like deals naturally will take longer to close in this economic environment.

Towards the end of Q2, we had one new logo deal flip out of the quarter, and one renewal did not occur until the very last day. And two, deal structures will likely shift toward being more customer-friendly. In March, two customers asked if we could invoice them in our fiscal Q4. These agreements impacted our accounts receivable and deferred revenue balance at the end of Q2 by approximately $3 million.

While we did not have any requests for escalating deal structures in March, we anticipate this is a likely possibility in the second half of the year and it's part of the offers Jason highlighted in his remarks. As you consider our outlook, it's important to note our subscription model provides us with significant visibility. While there might be quarter-to-quarter variability in our subscription revenue due to the timing of new deals, on-time renewals and deal structures, our visibility sits at 96% for the second half of the fiscal year. As a business, we have a healthy foundation of recurring revenue contracts.

Our professional services outlook reflects the discussions we've had with our customers regarding key projects. To date, there appears to be little in the way of disruption. Clearly, we remain in close contact with our customers in case changes to their delivery schedules are required. Turning to our outlook for the third quarter.

We expect total revenue to be in the range of 39.4 to $39.8 million, representing approximately 15% year-over-year growth at the top end of the range. We expect subscription revenue to be in the range of 28.7 to $29.1 million, representing growth of approximately 9% at the top end of the range. Non-GAAP income from operations is expected to be in the range of 3.2 to $3.6 million, and non-GAAP income per share in the range of $0.05 to $0.07 based on a fully diluted share count of approximately 35 million shares. Adjusted EBITDA is expected to be in the range of 3.4 to $3.8 million.

For full fiscal year 2020, we expect total revenue in the range of 154 to $156 million. We expect subscription revenue in the range of 114 to $115 million, which reflects an increase at the midpoint compared to the guidance we issued after the first quarter. Turning to profitability. We expect non-GAAP income from operations in the range of 13 to $14 million, and non-GAAP income per share in the range of $0.28 to $0.31 based on a fully diluted share count of approximately 35 million shares.

Adjusted EBITDA is expected to be in the range of 14 to $15 million. Our profitability guidance also reflects an increase at the midpoint compared to the guidance we issued after the first quarter. Before opening up the call for questions, I'd like to share some final thoughts with you. I continue to be very excited about our business.

We have a strong subscription business model. And as a vertical SaaS company, we have a great opportunity to serve our customers in Life Sciences and High Tech. As we contemplate the outlook for Model N, I believe we must be looking at our business through a conservative lens, and we should remain humble given the broader economic climate. We are committed to delivering profitable growth, and that commitment is unchanged even in the economic environment.

Thank you for joining today's call. Now I'd like to turn the call over to the operator for questions.

Questions & Answers:


Operator

[Operator instructions] Our first questions come from the line of Koji Ikeda of Oppenheimer. Please proceed with your questions.

Chad Schoening -- Oppenheimer and Company -- Analyst

Hi, this is Chad Schoening on for Koji. Thanks for taking the question and congrats on the great results, especially in this environment. Clearly another strong quarter of double digit subscription growth, which is really great considering all the disruption going on right now. Could you talk a bit about how the bookings grew between new logos and expansion opportunities? And then I have a follow-up.

Jason Blessing -- Chief Executive Officer

Yes. Chad, thanks for the question. So I would say Q2 was, quite honestly, like the last several quarters in the sense that we saw good performance from both new logo, as well as customer base sales. I would say also, the theme that we shared in Q1 of really strong traction in our Life Sciences customer sales team continued into Q2.

And so really our core franchise where 80% of our business comes from in Life Sciences, in general, continues to be very healthy. But really customer sales and the upgrade cycle that we're going through with customers transitioning to our SaaS offerings is really one of the bright spots in the business.

Chad Schoening -- Oppenheimer and Company -- Analyst

That's helpful. It sounds like the Life Sciences vertical is doing pretty well. Wanted to touch on the other 20% or so of the business in High Tech and just wondering how things are going there. And could you remind us about how pricing works there in that industry? And how should we be thinking about both product volume risk and churn in High Tech?

Jason Blessing -- Chief Executive Officer

Yes. I'll take the market question and then have David cover the pricing. I would say High Tech has pockets of strength for sure, particularly in some of the customers that are capitalizing on some of the secular trends like 5G network build-out, cloud computing. And even we've seen some customers who make products that go into life-saving devices like ventilators.

So there are pockets of strength. If I had to compare and contrast the two, I would say Life Sciences is certainly relatively stronger. And for us with our sales team, particularly as a vertical SaaS company, you'll see us in the second half of the year and honestly into next year, continue to focus on the pockets of strength in both of our core markets and focus where we can really help our customers, particularly in these difficult economic times.

David Barter -- Chief Financial Officer & Senior Vice President

And then, Chad, in terms of our pricing, it's very utility based and our pricing really is driven by three factors: the cloud subscription; the amount of the cloud subscription that you need to power your business; and then the number of users or end points. And that's a model that has actually served us well.

Chad Schoening -- Oppenheimer and Company -- Analyst

Great, that's super helpful and congrats again on the quarter.

David Barter -- Chief Financial Officer & Senior Vice President

Thanks Chad.

Operator

Our next questions come from the line of Terry Tillman of SunTrust. Please proceed with your questions.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Hey, Jason and David, can you hear me OK?

Jason Blessing -- Chief Executive Officer

We can.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

I'll echo the congrats, congrats on the quarter and all the commentary. It would have been great to see everybody -- see your faces in person but we did the virtual portion of the user conference this year. Hearing J&J and some of the other customers talking about kind of moving to the cloud, it was good content, so I appreciate it, at least the virtual nature of it. What I'm curious about, Jason, is because of what's going on and just the challenges and the opportunities that in your life science customer base, like your top 20 customers, is the conversation speeding up? Or is it changing? Or is the tenor changing in terms of the road maps moving to cloud? I'm talking about some of your biggest customers.

And obviously, you've had some early success, but curious on the ones that haven't moved yet. And is anything changing in the tone of those conversations?

Jason Blessing -- Chief Executive Officer

Yes, it's a great question, Terry. And appreciate the feedback on Rainmaker Live. So as I reflect on SaaS transitions and really look back over the last couple of years since I've been at the company and look forward into the future, there's a few things that stand out to me. First of all, I think we've been very effective at working closely with our customers to make sure that they understand the value prop of our SaaS offerings, particularly the importance of being current on mission-critical software.

So I think we have cracked the nut there. The second thing that I would point out that, of course, helps us in difficult economic times, is the cycle time to do these upgrades has compressed significantly, in that our first transition that we did with Gilead took 18 months, and the most recent one at Mallinckrodt that we talked about took six months. So it's a combination of better engagement with our customers and increasing the cycle time, I think, has been very helpful. And then our pipeline just continues to build as we've had more and more customers go live.

I referenced Novartis in my prepared remarks. That was a very large project at Novartis to get them current -- to a current version, to get ready to deploy to our cloud. We've got a similar project going on at Pfizer. We've got similar discussions going on at Johnson & Johnson.

So these are mission-critical systems, and our customers tend to take multiyear viewpoints on the investment horizon. And we really have not seen a slowdown in this part of our business.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Great. That's good to hear. And I guess, David, just my follow-up question relates to how -- and I know it's kind of tricky just because of puts and takes. But maintenance revenue as we think about the second half of the year compared to what the decline was in the first half?

David Barter -- Chief Financial Officer & Senior Vice President

It's a great question. I think when you think about maintenance revenue, I'd say organically it continues to be a very sticky revenue stream. And the way I think we thought about it last August as we were starting to set the frame for this year is probably still right that organically just through M&A, it probably comes down roughly mid-single digits. And if it's coming down a little bit faster than that, it's due to the interest and the push from customers around SaaS transitions.

So I think if the SaaS transition is going to continue, then the trends that we're seeing play out through the first half probably kind of continue moving forward through the second half. Does that help, Terry?

Operator

Our next questions come from the line of Ryan MacDonald of Needham & Company. Please proceed with your questions.

Alex Narum -- Needham and Company -- Analyst

Hi everyone, this is Alex Narum on for Ryan. I was hoping you could dig a little bit deeper in those kind of alternative pricing plans that you were talking about before.

Jason Blessing -- Chief Executive Officer

Yes. Alex, this is Jason. I'll take that. This is how I would describe it.

It's a portfolio of tools and incentives that we've put in our sales team's hands to really drive a few different things: one, show some flexibility with customers; two, work on continuing to build loyalty and long-term value with our customers; and then also helping our customers kind of navigate current budget cycles and ultimately how can Model N provide more value for the customer and help them through these difficult times. So let me just give you a few more specifics. So first of all on flexibility, as David talked about in his prepared remarks, we're continuing as, quite honestly, we have been over the last couple of years to being thoughtful to customers' needs on payment terms and deal structures. I think in this environment those two components probably get more customer-friendly and we have factored that into our outlook.

Second thing I would say is we've really been focused on loyalty and making sure our customers are fully engaged in using our products. And one example of that is making a number of new training, online training products available to our customers. So employees who are working from home can get even more proficient on the Model N solution. And then we have a basket of different offers that are aligned with our different selling motions to help provide more value to our customers.

And in many cases, that's some unique bundling, perhaps giving customers access to some software that they haven't used before to see it in their environment and get exposure to it, some of the new products that we've built and really build future pipeline with them around those products.

Alex Narum -- Needham and Company -- Analyst

OK. Great. And then also, what's the progress that you guys are being made right now for the migration of around 20 customers over to AWS? And have you guys completed that transition so far?

David Barter -- Chief Financial Officer & Senior Vice President

We've made great progress throughout the year, and that continues. It will continue into the second half of the year as we had forecasted at the beginning of the year, but we're very pleased with the progress.

Alex Narum -- Needham and Company -- Analyst

OK, great and thanks again.

David Barter -- Chief Financial Officer & Senior Vice President

Thanks Alex.

Operator

Our next questions come from the line of Chad Bennett of Craig-Hallum. Please proceed with your questions.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great, thanks for taking my question guys, and great job on the quarter in a challenging environment, and it's good to hear everybody is healthy with you guys. So I guess I'm hopping between calls, so hopefully -- or pardon me if I'm redundant. So Jason, can you maybe speak to if you -- again, or if you haven't already, logistically implementations in the current environment and kind of how you guys are managing that, considering the world we're in now? And then also in terms of higher-touch or enterprise-grade sales, which you guys definitely fit in that category, I'm sure you've probably mentioned moving to a virtual sales model. But any color there? And again, sorry if it's redundant.

Jason Blessing -- Chief Executive Officer

No, they're both good questions, Chad, and some context that we haven't covered yet. So first of all, what I would say on implementations, and I can say this after being 25 years plus in enterprise software, implementations over time have been moving toward more remote, more packaged delivery -- delivered services. And cloud has definitely further enabled that. So this is really part of a journey that we've been on as a company for a number of years, and I would argue that our industry has been on.

So we have been working more and more remotely over the last several years. But it is interesting, we -- I talked about this in my prepared remarks, we had a big go-live at Novartis in the quarter, and we typically would have been on site for some of the key cutover activities in the war room and providing support to our customer and their users. But we did it 100% virtual. And I would say the experience of our team and the fact that we're a software company and accustomed to working remotely, that was not a big deal for us.

But I have seen my team just doing a phenomenal job working with customers and teaching them how to work in this environment. So the final point I would make on that, we've also been very engaged with our top 10 customers and the projects that are going on right now to validate that they're going to continue. And they feel good about the remote delivery model, and the message back there has been very positive. Relative to sales, this is another area where I think customers are more akin to being sold to remotely these days, given all the productivity tools we have.

My sense tells me that as we look forward into the second half of the year, it's going to be easier to sell to existing customers where we have existing relationships and trust and they understand our value prop and who our people are. I think it's going to be easier there relative to new logos. But I guess historically, we've always assumed you had to meet someone in person and shake their hand to close a new business deal. And I think some of those assumptions, particularly in this world, are being challenged.

So but we'll continue to push on both fronts.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. That's good color. And so just in general, you aren't seeing, Jason, any real elongation of sales cycles or any kind of close rate changes on deals?

Jason Blessing -- Chief Executive Officer

Yes, I wouldn't want you to walk away, Chad, and say that -- think that there's been no impact. I would say as is always the case in economic cycles like this, CFOs get more involved in deal cycles, reviews can increase. But I think what we saw through the quarter and what we see a month into this quarter and looking forward to the second half, I think Life Sciences is going to be resilient, and I think there's going to be pockets of resiliency in High Tech. And that's really where we're focused.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. And did you comment, Jason, at all on new logo activity in the first half of the year or for the quarter?

Jason Blessing -- Chief Executive Officer

Yes, I did. I did mention one of the highlights, from a new logo perspective, was in Life Sciences, a mid-market company called Seqirus. Very interesting company, they're focused on influenza vaccines, so that's a very important therapy these days. And ultimately, they came to us in large part because of the current environment.

They're seeing a dramatic increase in demand for their offerings and their projects. And implementing our product is one of the things they're doing to shore up the business to meet the current demand.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Nice job, guys on the quarter, and it's good to see the guide come in where it did. So, thank you much.

Jason Blessing -- Chief Executive Officer

Thanks Chad.

Operator

Our next questions come from the line of Joe Vruwink of Baird. Please proceed with your questions.

Joe Vruwink -- Baird -- Analyst

Great, good afternoon everyone. I was wondering if you've gotten a sense, particularly with the life science customers, of whether revenue management is maybe moving up a bit in the pecking order within the broader scheme of IT projects. And I ask because when I think about some of the anecdotes you shared on time to value, I mean you can get -- and the transitions being down to, I think, you said six months, that's pretty impressive. But then even some of the initial landing modules like Provider, for instance, I think it can even be shorter than that.

So it actually seems like the type of projects where maybe it's never easy to grab a new logo, but it certainly seems like something that could still get done in the type of environment and therefore might be rising a bit in importance. But I wanted to get your thoughts of whether kind of your experience to date maybe backs that up or not.

Jason Blessing -- Chief Executive Officer

Yes, Joe, it's a good question. And I'll share a couple of -- a little bit of context with you to help with your thesis because I do agree with it. First of all, and again I'll go back to Seqirus. It's just a great example.

A company that had a patchwork of systems, and really view Revenue Management as a strategic cornerstone to their company's future growth and competing in the market. And so I do think the -- in this environment, Seqirus is a great example of the environment driving demand. You mentioned the cycle time improving -- or you referenced the cycle time improving on SaaS transition. That's absolutely a fact.

We're getting better at that, but we're also getting better at just new logo implementations and have a proprietary services methodology called Model N Express that we're using that is really a collection of templates and best practices and automated testing. And to the specific point you made, I mean we can get a customer live on Provider and seeing value within 20 to 22 weeks. So it can be a very quick return on investment for sure.

Joe Vruwink -- Baird -- Analyst

Great, that's great color. Thanks everyone.

Jason Blessing -- Chief Executive Officer

Thanks Joe.

Operator

Our next questions come from the line of Jackson Ader of JP Morgan. Please proceed with your questions.

Jackson Ader -- J.P. Morgan -- Analyst

Thanks for taking my questions this evening guys. I just had a question on the pipeline. Jason, I understand that as you look toward the second half of the year, existing customers probably are going to be a little bit more comfortable, as you mentioned, to purchase things virtually. But what about the pipeline of new logos? Even if you're not necessarily looking to close the same amount of new logos, how does the pipeline build look?

Jason Blessing -- Chief Executive Officer

Yes, I would characterize the pipeline in kind of three separate vignettes. The first one you already talked about, and that is we continue to see very strong support and pipeline growth for SaaS transitions in our customer base. The second area that I'm paying a lot of attention to is a team where we have a new leader and had made some thoughtful sales investments over the last year that focus on mid-market Life Sciences companies. And so those are companies like Seqirus that we've mentioned today And the pipeline in that segment has been growing very nicely.

I would characterize it as pipeline that has been growing for the last couple of quarters and is going to mature in the second half of the year and start driving business second half of the year and really setting us up for 2021. And then the third area that is really showing some promise is we've also added some key sales capacity in High Tech, really focused at the top end of the market, which is where we've been successful. If you think of some of our customers there like AMD, Western Digital, Poly and Qualcomm as just a few examples. And these reps have really been focused on that upper end of the market and prospecting, and we're seeing really positive trends there.

So definitely in an interesting time, some nice green shoots in each of those different areas.

Jackson Ader -- J.P. Morgan -- Analyst

Great, and then if I could just quickly follow-up on that last point. So mid-market life science seems to be a nice little vector for growth. What about that -- below the very large end in High Tech? Do you see yourself maybe in -- adding that as a strategic priority over the next couple of years?

Jason Blessing -- Chief Executive Officer

Yes. I think it's an attractive growth lever for us over the next couple of years as you characterize it. We just had some interesting greenfield at the top end of the market where we've proven our solutions work and deliver value for customers. And so it's just a matter of priorities and where do you start.

Jackson Ader -- J.P. Morgan -- Analyst

Yeah, OK that makes sense. Thank you.

Jason Blessing -- Chief Executive Officer

Thanks Jackson.

Operator

Our next questions come from the line of Brian Peterson of Raymond James. Please proceed with your questions.

Kevin Ruth -- Raymond James -- Analyst

Hi guys. Kevin here on for Brian. You spoke about the varying demand trends for some of your end customer segments. And I was curious if that in particular has had an impact on the mix of your near-term transition pipeline, and I guess the willingness of those customers to take on new projects, given the current demand environment?

Jason Blessing -- Chief Executive Officer

You broke up a little bit in the middle of the question. Could you repeat it, Kevin?

Kevin Ruth -- Raymond James -- Analyst

Sorry about that. Can you hear me better?

Jason Blessing -- Chief Executive Officer

Yes. I can hear you fine now. Thank you.

Kevin Ruth -- Raymond James -- Analyst

Got you. I was curious if the demand trends at some of the end customer segments, if you think that in particular has had an impact, I guess, on the mix of your pipeline and conversations you're having about, I guess, their willingness to take on a new project, given what's going on in their business right now?

Jason Blessing -- Chief Executive Officer

Yes. I mean it's a good point. I think given that our solution directly affects revenue and profitability, it's a top-of-mind topic for C-level people in any environment, but particularly in this environment. And so as I mentioned in some of the prior questions, I mean we just continue to see good strength in our core Life Sciences business.

And that ranges from a mix of new logos, customers who are trying to sort out the demand in this environment and shore up their operations to take advantage of it. And we continue to see progress on the SaaS transition. And the other thing that I haven't talked about yet but we do see as a by-product of this environment is customers just adding more usage, more seats to capitalize on a growing business, and we take advantage of that as well. So there's definitely a correlation between some of the end market demand signals that I talked about and the type of deals that are making its way into our pipeline.

Kevin Ruth -- Raymond James -- Analyst

Got it. That's helpful. And then maybe it sounds like the professional services organization has really switched over to a remote work environment without a hitch. I was curious what role will you see for on-site support in the professional services organization moving forward?

Jason Blessing -- Chief Executive Officer

Well, luckily, we've had a couple of big projects now that have proved that -- and when I say proved, it's really more to our customers, not our team -- that proved that some of those things we've historically thought we had to do on-site, that we can do them remotely. And again, I go back to the Novartis project that I referenced earlier. That's normally a complex cutover where we're going to have people on site in a war room during the cutover weekend and probably for a couple of weeks after. And we were able to get the customer comfortable that we'd be able to do that remotely.

And the customer ultimately took the leap of faith there with us. And I think that's going to be a project that we'll use as a great reference going forward for some of these other customers that are learning about this new way of working and working remotely with our partners.

Kevin Ruth -- Raymond James -- Analyst

Got it. Thanks guys.

Operator

Our next questions come from the line of Matt VanVliet of BTIG. Please proceed with your questions.

Matt VanVliet -- BTIG -- Analyst

Thanks guys. Thanks for taking my question. I just wanted to dig in a little bit more on some of the more recent trends that you've seen. You talked about just having the existing relationships with customers may prove to be a little bit easier in terms of expansion deals.

But I guess wondering if you've diverted resources or really sort of put extra resources behind some of those cross-sell, upsell opportunities, more so than focusing on new logos in the short term? And then how much of that is potentially factored into the back half of the year's guidance?

Jason Blessing -- Chief Executive Officer

Well, certainly, investment levels and what we're expecting in terms of yield are factored into our second half investment -- or excuse me, second half guidance. As we sit here today, we have the benefit of seven months under our belt, so we've got pretty good visibility into the business. So -- and remind me, I'm sorry, Matt, the first part of your question was about rediverting resources?

Matt VanVliet -- BTIG -- Analyst

Yes. Just curious if you've actually sort of taken some of the planned budget out of potential new logo generation and focused that in on near-term opportunities with existing customers, or if they're still running sort of separate tracks?

Jason Blessing -- Chief Executive Officer

Yes. Thank you for that. So we haven't made any dramatic changes here in the short term. And again, if I reflect how we've been running the business over the last few years, we've gotten a lot more focused on our sales model, first segmenting by industry; and then within each industry, segmenting by hunting and farming; and then making investments as we see demand materialize.

But right now, we do feel good about the resource levels and don't have anything major -- any major changes planned.

Matt VanVliet -- BTIG -- Analyst

And then, David, you talked about some flexible payment terms and a couple of customers either renewing sort of right at the end of the quarter or potentially renewing at the end of the year here. Curious if that -- or what direct impacts that might have on the overall -- both reported revenue but maybe more impactful on the overall margin structure as we look out to the end of the year?

David Barter -- Chief Financial Officer & Senior Vice President

It's a great question. Thank you very much for it. We -- I think as we've highlighted before, when we think about either maybe customers on quarterly payments, which we've highlighted before, it may be 30% of the business. Or even with escalating deal structures, the way we've set up our pricing model is that it's not impactful to our gross margins.

And I think we continue to prosecute business but we're providing that flexibility to customers. So I'd say overall, we -- you shouldn't think about our, I'd say, our profitability suffering in terms of the way we're going to market. What you can think about is when you're putting in place an escalating deal structure, the rev rec may be a little bit less. And so it is possible that what maybe while the customer might be in an implementation mode for that 20 or 22 weeks, you're earning a little bit less and then it's kicking up later on.

So that's probably the more of the -- when we thought about the outlook, what we were thinking about is just things that we did in '08 where in order to win the business and lock in growth for the future, maybe the rev rec is a little bit lower in the near term. So we feel good about how we've set up the business for profitability and growth. And I think the two are continuing to kind of work hand in hand as we work our way through the COVID chapter.

Matt VanVliet -- BTIG -- Analyst

And then just lastly quickly on a shift to virtual professional services and implementations. Does that have any impact on either utilization of those people from a billable hour perspective or an overall, I guess, either profitability on the -- excluding travel -- but maybe not billable travel on the revenue side. Just curious if that's going to impact professional services margins to any great extent?

David Barter -- Chief Financial Officer & Senior Vice President

The short answer is no, it will not. Right now, our utilization has been very healthy. We actually, as part of setting our outlook for the second half, went key account by key account, discussing with our customers the schedule, the resourcing and exactly how things would work. So we feel quite comfortable with the team that we have deployed working virtually, again, hand in hand with our customers in accordance with the schedule.

So I think it is one where you can expect that utilization will probably hold up. What I highlighted in my prepared remarks, we had a SaaS transition go-live milestone that happened this quarter, which did boost profitability a little bit. I think our profitability for professional services on a non-GAAP basis will continue to hover around 30%, given the outlook in terms of the engagements we're working on and the utilization of the team.

Matt VanVliet -- BTIG -- Analyst

Great, thanks for taking my question. I struggled in the quarter.

David Barter -- Chief Financial Officer & Senior Vice President

Thanks Matt.

Operator

Our next questions come from the line of Pat Walravens of JMP Securities. Please proceed with your question.

Pat Walravens -- JMP Securities -- Analyst

Oh great, thank you. I guess my first question is for Jason, then I have a follow-up for Dave. So Jason, is there any pending legislation or regulatory changes that investors should be keeping an eye on that might impact your business? Sort of like the conversation we were having last year about the safe harbor for the pharmacy benefit managers.

Jason Blessing -- Chief Executive Officer

Yes. Pat, thanks for the question. A lot of that discussion is still going on in the background but has really taken a backseat as the government and healthcare system has been dealing with the COVID-19 pandemic. I do expect, as we get into the summer and as we get closer to the election, I do think this will heat back up and become a central topic to the election.

And as you and I talked about in the past and I shared publicly, I think pending legislation in this area, it continues to be a good thing for us because it highlights the importance of revenue management and the importance of our customers being live. And on the current release of our product, that's going to be the first place where we address any of these regulatory changes.

Pat Walravens -- JMP Securities -- Analyst

Great. And then Dave, as CFOs all around us are sort of clamping down on spending, I'm wondering have you implemented any new spending controls within Model N? And if so, what sorts of things would those be?

David Barter -- Chief Financial Officer & Senior Vice President

It's a great question. We continue to do actually quite frankly the, Pat, the same behaviors we had before this chapter where each quarter, we do take a hard look at the P&L. We think very thoughtfully around how do we invest. And the flip side of that ledger, Pat, is how do we de-invest and how do we continue to find efficiencies in the business.

And that behavior certainly has continued in line with the remarks that Jason shared. We are orienting some of our kind of initiatives or our focus of the team around the green shoots. And I think as Jason highlighted, we will continue to make some targeted investments. But I'd say programmatically, we continue to be very meticulous around how we invest and utilize our headcount.

And equally, all of our program spend, we've been very thoughtful around making sure that each dollar of program spend, we feel like has a great ROI.

Pat Walravens -- JMP Securities -- Analyst

Great. But nothing new, like, "Anything above a certain dollar amount needs my sign-off as a CFO."

David Barter -- Chief Financial Officer & Senior Vice President

I sign off on most things, Pat, but commercial contracts and spend contracts, there's not too much that I don't see it in the P&L.

Pat Walravens -- JMP Securities -- Analyst

Yeah, OK great. Thank you.

David Barter -- Chief Financial Officer & Senior Vice President

Thanks Pat.

Operator

Our final question comes from the line of Gene Mannheimer of Dougherty & Company. Please proceed with your questions.

Gene Mannheimer -- Dougherty and Company -- Analyst

Thanks guys. I thought I got dropped. Congrats on a great quarter and outlook, especially in this environment. I wanted to just circle back to the comments around some of the concessions you're making around amount -- around maintenance and being more user-friendly, so to speak, with the contracts.

Where are we in that cycle in your view? Or do you think that we've seen the apex of that already? Or is this the start of a trend here around escalating contracts and maintenance breaks or deferrals? How much of that is baked into your outlook, would you say?

David Barter -- Chief Financial Officer & Senior Vice President

That's a great question. I mean I guess fundamentally, I guess when we think about it, Gene, we're not really -- concessions has such a specific accounting interpretation. I think what we are really doing around our deal structures is making it very easy whether our customer may be motivated for cash reasons. And hence, as we highlighted at the end of the quarter, we shifted some billing around for customers where ultimately it's escalating.

And I think it is one where we're kind of working very closely with our customers, knowing quite frankly how mission-critical the solution is to make sure that we match, ultimately, the contract to some of the ROI characteristics of our solution. So that it, quite frankly, makes it very easy for our customer really to say yes to move forward with a Revenue Cloud project at this time. And ultimately it kind of maps to what they're doing commercially within their business. But I think it is -- many of the things we're doing, Gene, are kind of maybe naturally going on some of those concepts.

We highlighted a couple of years ago where we thought we would start feathering in, escalating deal structures just to make it very easy to move forward with a Model N project and we have some of those same commercial characteristics that we're seeing from other software vendors. Does that help?

Gene Mannheimer -- Dougherty and Company -- Analyst

Makes sense. It does. It does. Thank you, Dave.

Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

David Barter -- Chief Financial Officer & Senior Vice President

Thank you, operator. We greatly appreciate everyone joining today's call. We look forward to speaking with you throughout the quarter at upcoming conferences. And of course please continue to be well and be safe.

Thanks so much.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

David Barter -- Chief Financial Officer & Senior Vice President

Jason Blessing -- Chief Executive Officer

Chad Schoening -- Oppenheimer and Company -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Alex Narum -- Needham and Company -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Joe Vruwink -- Baird -- Analyst

Jackson Ader -- J.P. Morgan -- Analyst

Kevin Ruth -- Raymond James -- Analyst

Matt VanVliet -- BTIG -- Analyst

Pat Walravens -- JMP Securities -- Analyst

Gene Mannheimer -- Dougherty and Company -- Analyst

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