Model N, Inc. (NYSE:MODN) Q3 2022 Earnings Conference Call August 9, 2022 5:00 PM ET
Company Participants
Carolyn Bass – Investor Relations
Jason Blessing – President, CEO and Director
John Ederer – Chief Financial Officer
Conference Call Participants
Robert Dee – Truist Securities
Chad Bennett – Craig-Hallum
Joe Vruwink – Baird
Ryan MacDonald – Needham
Johnathan McCary – Raymond James
Joe Goodwin – JMP Securities
Operator
Good afternoon, and welcome to Model N’s Third Quarter of Fiscal 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
With that, I would now like to turn the call over to Carolyn Bass of Investor Relations. Please go ahead.
Carolyn Bass
Good afternoon. Welcome to Model N’s Third Quarter of Fiscal 2022 Earnings Call. This is Carolyn Bass, Investor Relations for Model N. With me on the line today are Jason Blessing, Model N’s Chief Executive Officer; and John Ederer, Chief Financial Officer.
Our earnings press release was issued at the close of market and is posted on our website. The primary purpose of today’s call is to provide you with information regarding our third quarter of fiscal 2022 performance and offer a financial outlook for our fourth quarter and fiscal year ending September 30, 2022. The 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 metrics are included in the earnings press release issued today, which is available on our website. I encourage you to visit our IR website at investor.modeln.com to access our third quarter press release, periodic SEC reports and the webcast replay of this call. Finally, unless otherwise stated, all financial comparisons in the call will be to our fiscal year 2021 results.
And with that, I’ll turn the call over to Jason.
Jason Blessing
Thanks, Carolyn, and good afternoon, everyone. Thank you for joining our call. Today, we posted outstanding third quarter results, one of our best quarters ever. We exceeded all key guidance metrics, including total revenue, subscription revenue, professional services revenue and adjusted EBITDA. We also had another very strong bookings quarter with contributions from all growth levers. At the start of the fiscal year, we set the target to exit the year at a 20% ARR growth rate. Based on our solid execution, SaaS ARR growth is now accelerating in excess of 20%, and we expect to be at or above this number over the long term.
John will provide more color later in his remarks. In Q3, we also continued to cement Model N’s position as the preferred Life Sciences revenue management provider. In the quarter, we closed SaaS transitions with Genentech, Sunovion and GSK, 3 of the largest pharma companies in the world. 2022 has been a pivotal year as the conversion of our remaining on-premise customers to the cloud continues to accelerate. We remain ahead of our internal plan for SaaS transitions, which is one of the growth levers driving upside this year. And perhaps even more importantly, we are seeing a meaningful amount of new sales coming from non-SaaS transition deals, which bodes well for the future.
Given the success we are experiencing with SaaS transition, we also continue to see our maintenance decline at an accelerating rate compared to recent levels. Declining maintenance is a seminal event in any on-premise to SaaS transition, and we view this as a very positive trend in the business.
Next, I’d like to share some quarterly business highlights. During the quarter, we enjoyed strong momentum in Life Sciences bookings, which included the 3 new SaaS transitions that I already mentioned and numerous other wins, including new logos and selling into our customer base. What is most encouraging to me is that the majority of our new bookings came from all other deals, which shows how we are well positioned for continued growth as the SaaS transitions come to a conclusion.
In the quarter, we signed multiple new Life Sciences customers, including Genmab and Moderna, one of the pioneers in COVID-19 vaccine. And as we have discussed on our previous calls, SaaS transitions have been a great catalyst to get back in front of our customers and tell the Model N story. As we continue to deliver on successful SaaS transitions, this is also driving accelerating cross-sell and upsell.
We saw this trend continue in Q3 with expansions at several marquee Life Sciences customers, including Genentech and Gilead. As we’ve talked about previously, complexities within the health care regulatory environment create an opportunity for Model N to innovate and help our customers more efficiently distribute their life-changing products to the world.
One example is the federal 340B drug price control program that allows qualifying providers, serving uninsured and low-income communities to purchase drugs for manufacturers at significantly reduced prices. However, this program creates complexity as manufacturers need to determine who is eligible to purchase under this program and who is not, so they can prevent revenue leakage.
Given the increasing utilization of the 340B purchase program under ObamaCare, our new product has begun to resonate in the market. During Q3, we scored wins at Gilead and Astellas. 340B is another great example, like state price transparency management, where we are able to quickly bring products to market to help our customers address changing regulatory requirements.
We’re also seeing traction in EMEA, which is another long-term growth driver for us. During Q3, the team signed Galderma, a Swiss pharmaceutical company that specializes in dermatological treatments. Galderma assignment agreement to deploy our global price management, provider management and deal management solutions to support their growing business.
Galderma solved one solution to manage pricing across 3 divisions to enable them to standardize their practices around contracting and rebates company-wide. Model N was selected because of our strong products, referenceable customers and our team’s great domain expertise, all of which will support Galderma’s growth over the next several years. We also saw a strong performance from business services in the quarter.
Mycovia Pharmaceuticals, an emerging biopharmaceutical company is another great example of how the business services value proposition resonates with a precommercial company. Mycovia recently launched their first product, VIVJOA, a drug used to treat key women’s health issues. Mycovia purchased government pricing, commercial contracting and our cloud analytics suite to help scale their business. Mycovia selected Model N due to our deep expertise and track record of assisting emerging pharmaceutical companies with successful product launches. Business Services also closed expansion deals at several other customers, including Medexus.
Medexus is notable because they became our newest state price transparency management customer. Turning to High Tech. As I mentioned on our last earnings call, this segment has exceeded my expectations so far this year as this vertical seems to be returning to a more normal buying pattern. We continue to see traction with both new logos and customer-based deals.
During Q3, we won a highly competitive new logo deal at Analog Devices, the second largest semiconductor company in the world. If you recall, last year, Analog acquired Maxim Integrated in a $20.8 billion mega merger of the 2 semiconductor giants. After a thorough evaluation, Analog selected Model N Deal Management and Channel Data Management to support the combined company. We also saw High Tech expansions during Q3 at both SOLODYN and Targus. SOLODYN is a great example of how our team has been successful at landing and expanding in a new account. During Q2, SOLODYN added Channel Data Management, or CDM, to provide better visibility into channel sales to ensure they are properly enforcing pricing agreements. The addition of CDM came on the heels of a successful project deployment earlier this year and is another example of happy customers buying more products.
Turning to Professional Services. Our services team continues to deliver the majority of projects on time, on budget and a truly best-in-class services margins. This delivery excellence is also playing a key role in our sales cycles by providing proof points that we can help our customers rapidly realize value from their Model N investment like the SOLODYN example that I referenced earlier.
We have also had several successful go-lives recently, and I’d like to highlight a few examples. Seqirus, one of the world’s largest influenza vaccine companies saw their business grow rapidly during the pandemic and came to Model N to help manage that growth. Seqirus is now fully live on Model N and a great example of how our experienced services team can partner with a customer to rapidly deploy our products and deliver value. This project included the implementation of Model N to streamline compliance tracking and automate the exchange of data with Seqirus’ ERP system.
This new solution will allow Seqirus to review and modify contracts in real time to ensure commercial and regulatory compliance and reduce revenue leakage. Since going live, we estimate that this integrated solution has saved Seqirus millions of dollars in the form of more accurate payments of chargebacks and rebates. As previously reported, we have signed several large SaaS transitions over the last 18 months, and it is great to see many of these projects coming to successful conclusions.
Novartis a top 5 global pharma company signed a SaaS transition in our Q2 fiscal 2021, and I am proud to report that they successfully went live on the Model N cloud during Q3. The Novartis SaaS transition was completed in just 13 months, which is truly remarkable given the size and complexity of their business. Novartis’ SaaS transition is a critical project in their digital transformation, and it will allow them to more cost effectively leverage Model N innovation and regulatory updates in the future.
I am particularly proud of this project because we also partnered with Novartis to make several enhancements to global price management, which were also implemented during this project. EMD Serono is another large global pharmaceutical company that also went live during the quarter. EMD has a complex model in deployment and processes over $1 billion of payments through our platform. And what’s even more impressive is the fact that they were able to complete their SaaS transition in just 17 weeks. With Model N SaaS platform, EMD is looking forward to remaining compliant with changing regulations and leveraging innovation delivered through Model N seasonal product releases.
I’d like to close by saying that I am very proud of how our team has performed this year. We are capitalizing on all growth levers, including SaaS transitions customer sales, new logos and EMEA expansion. I am also encouraged by our team’s strong execution in a very dynamic global environment. The team’s performance is driving tangible results in the form of accelerating SaaS ARR and improving profitability. Model N has truly hit an inflection point in our SaaS transition journey, but I still believe that the best is yet to come.
Now let me turn the call over to John to discuss our Q3 financial results and provide an update on our guidance. John?
John Ederer
Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we delivered very strong third quarter results, exceeding all of our guidance metrics. Revenue upside was driven by both subscription and professional services and adjusted EBITDA margin hit a new quarterly record at 17.9% in Q3. We’ve executed well during fiscal ’22 and our strong bookings performance continues to improve our outlook for the full year. I’ll discuss this when we review our updated guidance later in the call.
Turning to our financial results for the third quarter. Total revenue grew 10% to $56.2 million, which exceeded the top end of our guidance. Subscription revenue increased by 10% to $40.6 million and also exceeded the upper end of our guidance range, and we saw upside from professional services revenue, which grew by 11% year-over-year to $15.6 million.
Looking at profitability for the third quarter. Total non-GAAP gross profit was $34.6 million, equating to a gross margin of 62% versus 60% in Q3 last year. Non-GAAP subscription gross margin improved sequentially to 68% compared to 67% in the second quarter. And non-GAAP gross margin for Professional Services was very strong again in Q3, hitting 44% versus 41% a year ago as this team continues to execute extremely well. Operating expenses for Q3 were lower than expected due to the timing of some hiring and other investments. As a result, adjusted EBITDA for the quarter was $10 million and well ahead of the high end of our guidance of $7.5 million.
Adjusted EBITDA margin was 18% for Q3 versus 14% a year ago. Q3 marks the fifth consecutive quarter that our adjusted EBITDA margin has been back in the mid-teens. Finally, non-GAAP income was $8.5 million or $0.23 per share which is well above the high end of our guidance of $0.16 per share. On the balance sheet, we ended the quarter with $184.5 million in cash and equivalents which was up $14 million from the end of March on very strong cash collections. This solid performance brought our free cash flow for the trailing 12 months ended June 30, up to $26.5 million versus $15.6 million for the comparable period 1 year ago.
Current deferred revenue of $54.1 million was down slightly on a year-over-year basis as increases in SaaS deferred revenue have been offset by declines in maintenance deferred revenue. Deferred revenue can fluctuate during the year depending on invoicing cycles, the timing of renewals and other factors. As an indicator of our recent bookings performance and the future predictability of our business, we typically focus on RPO or remaining performance obligations.
For Q3, our total RPO grew to $310.1 million, which was up 41% on a year-over-year basis. While the current portion of our RPO balance was up to $127.1 million, representing growth of 21% year-over-year. The key driver of our RPO results has been the transition to SaaS. About a year ago, we started providing more visibility on this part of our business as we’ve used SaaS ARR and SaaS net retention as key drivers of our long-term model. For the third quarter, we are very pleased to report that SaaS ARR hit $101.1 million as year-over-year growth accelerated to 24%.
Going over the $100 million mark in SaaS ARR was an important milestone for the company and the SaaS component represented 62% of our total subscription revenue in the quarter. SaaS net retention was also very strong in Q3, coming in at 123% and reflects the mission critical nature of our software.
Now let me turn to our guidance. For the fourth fiscal quarter, we expect total revenue to be in the range of $56 million to $56.5 million with subscription revenue in the range of $41.5 million to $42 million. I would note that while the total revenue guidance is essentially the same as the implied guidance from our Q2 earnings call. The mix has shifted to higher subscription revenue and lower professional services revenue.
Project backlog, utilization and gross margins all remain very strong for our professional services business but we are seeing more vacation time being used this quarter and therefore, lower billable hours. In terms of adjusted EBITDA, we are expecting a range of $8 million to $8.5 million. And for non-GAAP EPS, we are expecting a range of $0.18 to $0.20 per share based on a fully diluted share count of approximately 37.4 million shares.
For the full year of fiscal 2022, we are raising our guidance for the third time this year and now expect total revenue to be in the range of $217 million to $217.5 million, subscription revenue to be in the range of $158.4 million to $158.9 million, adjusted EBITDA to be in the range of $31.9 million to $32.4 million, representing an adjusted EBITDA margin of 15% and non-GAAP EPS to be in the range of $0.70 to $0.72 per share based on a fully diluted share count of approximately 36.9 million shares.
Looking ahead to next year, while we have not finished our fiscal 2023 planning cycle, we do expect certain trends in the business to continue. First, we are seeing an acceleration in SaaS ARR, particularly as large SaaS transitions continue to close and we expect to generate SaaS ARR growth above our long-term target of 20% over the next year.
Second, maintenance revenue has also started to decline more rapidly which is the key inflection point that you often see in SaaS transitions. Netting these 2 trends together, we are comfortable with where the current analyst estimates are for subscription revenue next year and the $175 million to $180 million range.
Finally, from a professional services perspective, we continue to see high demand for our team, but we would expect the growth rate to moderate to the high single digits after such a strong year in FY ’22. In summary, we are excited about the path that we are on and the tremendous progress that is being made this year towards becoming a true SaaS business. And while the bookings performance and SaaS growth naturally capture the most attention. In my role, I was particularly pleased by our record profitability and strong cash flow generation during the quarter. The combination of 24% SaaS ARR growth and 18% adjusted EBITDA margin is the epitome of our profitable growth strategy and reflects the hard work and dedication of everyone here at Model N.
Now I’ll turn the call over to the operator for any questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] We have a first question from the line of Joe Meares with Truist Securities.
Robert Dee
This is Robert Dee on for Joe Meares. I’m just curious, how many states now have state price transparency regulations and how many are working on them. How should we think about the potential market size for state price transparency management?
Jason Blessing
Yes. Thanks for the question, Robert. So the current number of states that have enacted state-specific regulation is 22%. And that number is up from the mid- to high teens last year throughout the course of this year. So it is something that’s becoming very pervasive. And we believe it’s entirely possible that all 50 states could have unique regulation over the next couple of years. So it’s a relatively new trend in the marketplace, something that we’ve been able to respond to very quickly with this new product that we codeveloped with Pfizer. And it is one of the fastest-growing areas of our pipeline at this point. So it’s a very interesting market opportunity for us.
Operator
We have next question from the line of Matthew VanVliet with BTIG.
Unidentified Analyst
This is Bill McNamara subbing in for Matt VanVliet. Question is, what were the key drivers to the significant improvement in SaaS net dollar retention? And how sustainable is the higher level over the next several quarters?
Jason Blessing
Yes, Bill, I’ll take that. So net dollar retention is a relatively new metric that we’re disclosing publicly. We started disclosing it at the beginning of this fiscal year. And at that point, set a target to be in the $110 to $115 range. We have since reporting or setting that objective, we’ve been able to pretty consistently beat that every quarter. And I think what’s encouraging when I look at that number each quarter is it’s not any one thing, any one product, for example, that’s driving the higher net dollar retention. It’s really about us being able to get back in front of our customers as a result of SaaS transitions and some of the new products that we’ve built and brought to market and retail, the Model N value prop, and that’s been resonating very well. So it’s a very broad-based set of products and services that are driving that high net dollar retention number. And this was a very strong quarter for us.
Operator
We have next question from the line of Chad Bennett with Craig-Hallum.
Chad Bennett
So I mean, you effectively hit your exit rate for SaaS ARR quarter early, which is great and the acceleration of SaaS ARR and net expansion all look good. I just — in terms of looking at — and I appreciate the early look into next year, but it just seems like we should think about at least a decent acceleration on the subscription line. I appreciate the maintenance dynamic, but if I’m roughly right, your SaaS business is now probably 5x your maintenance business and from an ARR standpoint. So John, I know we want to be conservative, but what would — what are the puts, I guess? Or what would be the throttles on a pretty decent subscription acceleration in the next few quarters?
John Ederer
Yes. So I mean, I think if you look at the model today and what we’ve talked about so far, that subscription portion, the SaaS piece in particular, is about 62% of the business we noted that for the Q3 number here. And so yes, this is the majority of the subscription line, but it’s not all of the subscription line. It is growing very nicely, and we’re actually expecting to see an acceleration of that growth rate and we do expect it to be above our 20% long-term target here over the next several quarters and really through next year. But offsetting that is a much more rapid decline on the maintenance side of things. And so when we look at the balance of those 2 things and we look out to next year, we are expecting to see subscription growth overall as implied by the numbers we endorsed. But you still have a little bit of a cross current in there.
Chad Bennett
Got it. I appreciate the color. And then if we look at — maybe another one for you, John. I mean gross margins — especially subscription gross margin. Look, really good sequentially. I think it was almost up 200 bps. How should we think about that going forward? And then also you noted the record EBITDA margins. Just you’ve always been a very rational and balanced model from a revenue growth and EBITDA leverage business. How do we think about that going into next year?
John Ederer
Yes. Sure. No, great question. And First, on the gross margin side of things and on subscription in particular, that will depend a little bit on the mix of business between our SaaS business and the business services component. But the SaaS business has been growing relatively faster, and we do see opportunities to continue to expand that as we grow and as we continue to scale. On the EBITDA side of things, yes, this was a record quarter in Q3. You’ll see that our guidance implies a little bit lower margin in Q4. But still rounding out at 15% for the year, which will be up on a year-over-year basis. And I think as we think about the business and look at the different opportunities in front of us, we’re always constantly weighing the opportunities for investment versus also dropping some down to the profitability side of things.
And I think you’ll see us continue to do that kind of a balanced approach, particularly as we get a little bit deeper into our planning for next year, we’ll start to make some of those trade-offs and make sure we’re still investing for growth while also driving profitability.
Operator
We have next question from the line of Joe Vruwink with Baird.
Joe Vruwink
Maybe I’ll start with a bit of a current events question. Jason, you brought up how a changing regulatory requirements that typically is good for Model N. Anything in the provisions that passed Congress recently where you would say this definitely is going to help us? Or does it maybe just get folded into the broader idea that you need dedicated solutions in place when thinking about engaging with Medicare, Medicaid or just having a better overall sense of your pricing strategy?
Jason Blessing
Yes. It’s a great question, Joe. So yes, the Inflation Reduction Act that the Senate passed and sent over to the house over the weekend, made for some great weekend reading for my team in the — and the short answer is, yes, it does help us and does help drive demand for our solutions. There were a couple of key provisions in that build that affect our customers, manufacturers the first of which is a new rebate scheme that will be implemented that calls for Medicare to get higher rebates for drug prices, drugs that are increasing at a rate faster than inflation, and then also gives Medicare the rights to negotiate directly with drug manufacturers on specific drugs.
So we are still trying to evaluate everything that is in the roughly 750 page section of the bill that covered health care. But it does look like it’s going to require some changes to our product. And by the way, we’re used to making these types of changes. We make them almost every year and in some cases, quarterly. So this act is just the most recent example of how things in Washington continue to make the regulation more complex, and makes it more obvious our value proposition and also makes it more important for customers to be current and beyond our cloud release because that’s where we’re going to implement these regulatory changes first and foremost. So — yes, great question.
Joe Vruwink
Okay. Okay. That’s all interesting. And then you made kind of a passing comment along the lines that you’re starting to think about maybe life after SaaS transitions. And I’m just wondering what inning does this stand at, I think entering the year, maybe half of logos that were in the installed base could still undertake this? Where does that stand?
Are you may be reaching a point where SaaS transitions, it could be something you could talk about for a number of years. But in terms of consequence given progress last year and this year, you’re maybe capturing a lot of the dollar potential at this point? And then to, I guess, round out the question, once this topic is done what do you kind of look at or get excited about as sustaining as you’ve been bringing up the 20% plus growth in SaaS revenue.
Jason Blessing
Yes, I’ll start with the last point of that question and then answer the first part. I think it’s very encouraging. We look at our bookings internally and as we talked about externally, the majority of our bookings now are not coming from SaaS transitions or certainly in Q3. It’s from new products like state price transparency management, 340B, deal management, events, membership management, Model N Pay and our High Tech product. .
So we’re seeing really nice contributions from new products. And as I’ve said this last couple of years has been about getting back in front of customers and retelling the Model N story. And as you’ve seen in our net dollar retention, that story has been resonating really well with customers.
So again, we continue to see acceleration from non-SaaS transition bookings and it’s very broad-based. At the beginning of the year, to your point, we did give an update and say we’re kind of at the — roughly the halfway point on logos and revenue. We’ve obviously had a very strong year so far through 3 quarters, signing new customers will give a more specific update as we turn the year over to next fiscal. But what I will say is that, again, we’ve made significant progress this year. We’ve got a little bit more than a year left before on-premise end of life.
And that deadline has certainly gotten new customers attention. And as I’ve said, starting when we announced in the life, most customers are not going to let a compliance system like this though unsupported. And so we think we’re going to — we have very good visibility into the remaining customers and a good handle on when they’ll convert. And I think when this chapter is complete, we’ll look back and say we converted substantially all of our customers from on-prem to the cloud.
Operator
We have next question from the line of Ryan MacDonald with Needham.
Ryan MacDonald
Congrats on a great quarter. Jason, I’m curious — I was really impressed by the commentary that you made about sort of success with new logo adoption. I think as we’ve looked at the story, we all understand that selling back to the base and managing through the transition has really driven the majority of the revenue growth historically.
But I’m curious, when you think about the success on new logos, what’s perhaps been the catalyst that’s really starting to unlock that opportunity there? Is it something just in terms of improved sales productivity, more talent coming in? Or I’d be curious to get your thoughts on what the catalyst is really opening these new doors.
Jason Blessing
Yes, it’s a great question, Ryan. So like a lot of companies during the pandemic, we made a conscious decision to focus a disproportionate amount of our resources on our customer base where we have existing relationships and we felt would face lower friction in selling during uncertain times. And I think reflecting back on that, that has certainly been the case, and then you combine that with the fact that we have an end of life coming up, we have continued to have a disproportionate amount of resources dedicated to customer base selling. As we came into this year, though, we started to adjust that bias to have more folks focusing on new logos, incremental people focusing on new logos. And so we’re starting to see that pay off first and foremost.
Our value prop in both verticals continues to resonate extremely well. And then as we’ve talked about in the past, Life Sciences is just a very durable vertical through the pandemic through the times that we’re in now and that continues. But High Tech has also come back nicely after a couple of years of lack of investment. We’ve really seen that a cautious investment, I should say, we’ve really seen that vertical come back. And I think there’s a little bit of pent-up demand there. So really all those things are coming together to drive some of the performance you’re seeing on the new logo side.
Ryan MacDonald
Excellent. And then as you think about the High Tech vertical and sort of coming back to more normal seasonality. I guess as you look at the — what the pipeline looks like relative to last year, can you provide any color on sort of magnitude of growth in the pipeline of opportunities, what that mix looks like sort of back to base versus new logos?
Jason Blessing
Yes. It’s a healthy mix, and I’ll just give you kind of the bigger picture on both verticals. So pipeline in both verticals has continued to build both base and new logo. I would characterize the life — I would characterize Life Sciences as being very healthy. We’ve been closing a lot of business this year, but have continued to build pipeline. Even though we’ve been closing a lot of it. And then I would say, High Tech really started to stabilize and grow last year as we came into this year, and it’s been a very stable trend throughout the year and also a nice mix of new logo and customer base.
Ryan MacDonald
Congrats, again.
Jason Blessing
Thanks, Ryan.
Operator
[Operator Instructions] We have a next question from the line of Brian Peterson with Raymond James.
Johnathan McCary
This is Johnathan McCary on for Brian. It will just be one from us. So given that you’re in a pretty strong position with a lot of your customers, how do you think about pricing as a growth lever in the near term, maybe even longer term?
Jason Blessing
Yes. We’ve been very successful as we’ve been modernizing our contracts with customers and moving them over to SaaS doing a couple of different things. One is implementing an innovation index that allows us as we move through the contract to renewal to raise prices. And then we also have been pretty successful implementing inflation or CPI plus into our contracts as well. And obviously, the way inflation has been tracking that has reduced and that has resulted, excuse me, in some healthy price increases so far this year. So I think you’re seeing a case of a market leader that provides a mission-critical product or solution to our customers, and that does give us some pricing control in the market for sure.
Operator
We have next question from the line of Joe Goodwin with JMP Securities.
Joe Goodwin
So on the maintenance portion of the subscription revenue, my apologies, if you did mention this earlier, I’ve been up in around from a couple of different calls. But you say it’s accelerating in terms of its runoff out of the model. How should we think about that can you give a little more color? Is that above that range, John, that you had shared that kind of low to mid-double digits as we think about next year, is it going to be stepping up closer to 20% rolling off at any sort of — any color there would be great.
John Ederer
Yes, sure. Happy to, Joe. So yes, just to, I guess, reiterate some of the comments that we made before the maintenance had been declining in the mid- to high single-digit range last year. And then as we turn the corner for this year, we started to expect a higher decline, and we thought that by Q2 we’d be in the mid-teens from a double-digit decline perspective. As we get into Q3 and as we look forward to next year, we’re seeing that rate accelerate even further. I don’t want to get too specific yet, particularly as it pertains to next year, but we are expecting that to decline at a faster rate than what we’ve seen and become a little bit of a bigger offset to that SaaS ARR growth on the other side.
Joe Goodwin
Understood. Okay. And then it sounds like on the Deloitte or the business services, excuse me, that’s going well with the pre-revenue customers. But have you seen any softness there? I know you called out people taking PTO. But is there any softness from some of these smaller kind of pre-revenue Life Sciences customers?
Jason Blessing
We haven’t seen softness. I want to clarify. So the John referenced in our professional services organization we were seeing some higher vacations during the summer, and that’s what led to — that’s just leading to the forecast that John articulated on professional services. So completely different from business services. And on the business services front, no, we haven’t seen any softness. In fact, there’s still a very robust pipeline for new drug introduction, and that’s actually the list of customers, excuse me, of prospects that we target for that solution. So no softness there.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the call back over to Jason Blessing, CEO for closing remarks. Over to you, sir.
Jason Blessing
Thank you, operator. And I’d once again like to thank all of our employees for their hard work and solid execution, which clearly illustrated this quarter and our strong results and our guidance for the rest of the year. I’d also like to thank our customers for the trust they place in us and we do really value their partnership with us. So thank you, everyone, for participating today, and have a great night.
Operator
Thank you very much, sir. Ladies and gentlemen, this concludes today’s conference. You may now disconnect your lines. Thank you for your participation.
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