U.S. Markets closed

Edited Transcript of SLP earnings conference call or presentation 10-Jul-19 8:15pm GMT

Q3 2019 Simulations Plus Inc Earnings Call

LANCASTER Jul 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Simulations Plus Inc earnings conference call or presentation Wednesday, July 10, 2019 at 8:15:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John R. Kneisel

Simulations Plus, Inc. - CFO

* Shawn M. O'Connor

Simulations Plus, Inc. - CEO

================================================================================

Conference Call Participants

================================================================================

* Cameron Donahue

Hayden IR, LLC - Regional VP and Partner

================================================================================

Presentation

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [1]

--------------------------------------------------------------------------------

Good afternoon, everyone. On behalf of Simulations Plus, I welcome you to our third quarter fiscal year 2019 financial results conference call and webinar. Hosting the call today is Simulations Plus' CEO, Shawn O'Connor; and the company's CFO, John Kneisel. (Operator Instructions)

Before beginning, I would like to remind everyone that with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve numerous risks and uncertainties. The actual results of the company could differ significantly from those statements. Factors that can cause or contribute to such differences include, but are not limited to, continued demand for the company's products, competitive factors, the company's ability to finance the future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve the current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

With that said, let's then turn the call over to Shawn O'Connor. Shawn?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [2]

--------------------------------------------------------------------------------

Thank you, Cameron. This was a very strong quarter for Simulations Plus. We made excellent progress with regard to our key initiatives for the year and our financial results are reflective of the return on these investments with increased revenue growth and profitability during the quarter. As we have previously discussed, we have historically grown revenues in the 10% to 15% range, excluding the effects of acquisitions. We have been focused on delivering at the high end of that range and in the long run, beyond that range. Our third quarter revenue growth at 16% demonstrates good execution on this objective, especially compared to fiscal year '18 Q3 growth of 11%, adjusted for last year's acquisition source growth.

Our software revenue growth achieved record levels amidst our largest seasonality renewal quarter. Our consulting revenue growth accelerated to 39% year-over-year, reflecting the growth of our service capacity through successful recruiting efforts and the significant projects related to RENAsym and IPF, which initiated late last quarter. We have made progress with respect to each of our key initiatives. During the quarter, we hired another senior consulting scientist with business development skills who is scheduled to start with us in the fourth quarter. Not including this addition, we grew the consulting staff by 3 during the quarter and have now increased the company's consulting staff by 22% year-over-year. This capacity growth is critical to our efforts to meet the strong demand for services across all 3 divisions.

I'm especially pleased with our efforts to coordinate our sales and marketing effort across each of the divisions, which is beginning to deliver results. During the quarter, we were successful in closing business with a large pharma client with a proposal that included both software products and consulting services sourced across our 3 divisions.

Internationally, we made progress as well. While we did not add personnel in Europe during the quarter, we have hired 2 additional consultants who will begin in the fourth quarter in Europe, doubling our staff in this geography. In Asia, we have completed the expansion of our existing distributor relationships to include our DILIsym products.

While these investments add to expenses in absolute dollars, the resulting increased revenue growth rate has kept our expenses as a percentage of revenue at or below historical rates. Our 16% revenue growth in the quarter was achieved while delivering a 20% increase in net income year-over-year. Year-to-date, our 13% revenue growth was achieved while delivering a 25% increase in net income, excluding the effects of last year's deferred tax benefit adjustment. And not insignificantly, our cash position continues to grow, net of continued dividend payments and funding of deferred acquisition costs.

Overall, we made good progress on all key initiatives, and I'm encouraged with the results and the team that we have in place to execute on our strategies.

Turning to our third quarter results by division. In our Lancaster division, overall revenue was up 7% year-over-year and 8% year-to-date. Software revenue at $5.4 million is a record for the company in this third quarter with our highest level of renewal business. Consulting revenue in this division grew 53% on a small base reflecting the demand, however, for collaborative efforts for GastroPlus enhancements and PBBK modeling assessments.

Overall, our Lancaster division continues to enjoy good revenue growth in line with renewal seasonality and in line with our historical growth expectations. Breaking this down further, 81% of our revenue was from renewals, 10% from new licenses and 9% from consulting. Our renewal rates were 85% based on accounts and 93% based on fees. Our license units at 284 were up 5% year-over-year. We added 7 new commercial companies and 11 nonprofit groups. We have projects with 28 companies and 4 funded collaborations.

During the quarter, we strengthened our relationship with regulatory agencies worldwide. The FDA purchased 15 user license for our ADMET Predictor software suite. The purchase was made by the Center for Tobacco Products to support research projects aimed at informing regulatory decision-making. In addition, we received an order from the Pharmaceuticals and Medical Device Agency in Japan to add licenses to its GastroPlus software suite. As a reminder, working with the agencies like the FDA and PMDA is important to Simulations Plus as it validates our modeling software and builds awareness throughout the industry. Often, employees at these regulatory bodies ultimately leave to work for pharmaceutical companies and if they have positive experiences with our software, they bring these experiences with them to the new employer.

In addition, during the quarter, we released version 9.7 of our flagship, physiologically based pharmacokinetic modeling platform, GastroPlus. This version included improvements that support safety and efficacy decisions, first-in-human estimations, formulation optimization and drug-drug interaction assessments.

We ended the quarter with 46 full-time employees at our Lancaster division, up from 41 in the prior quarter and up from 38 last year.

Buffalo also -- excuse me, Buffalo achieved 31% revenue growth year-over-year and 20% growth year-to-date. This has been a year of strong growth for this division. Its performance reflects client demand and increased consulting resources to deliver projects. Buffalo has built a solid pipeline with new and existing clients. We ended the quarter with 45 FTEs at our Buffalo division, up from 42 in the prior quarter and up from 41 last year.

Our Research Triangle Park division delivered robust 44% year-over-year revenue growth and 21% growth year-to-date. DILIsym released NAFLDsym Version 2A, quantitative systems pharmacology modeling software to support the development of treatments for nonalcoholic fatty liver disease, during the quarter. We ended the quarter with 17 full-time employees at RTP, flat at 17 in the prior -- from the prior quarter and up from 15 last year.

Overall, this was a good quarter for Simulations Plus with strong revenue growth, consistent profitability and quantifiable progress against initiatives with future growth impact.

Let me now turn the call to John to review detailed financial results. John?

--------------------------------------------------------------------------------

John R. Kneisel, Simulations Plus, Inc. - CFO [3]

--------------------------------------------------------------------------------

All right. Thanks, Shawn. Appreciate it. Looking at our consolidating net revenues for our third quarter fiscal year '19, they were up 16.2% or approximately $1.4 million to $9.9 million compared to $8.6 million for the prior year. By division, Lancaster's revenues were up 7 -- or 6.6% or almost 7% to $6 million, Buffalo revenues were up 30.7% to $2.5 million, and RTP revenues were up 43.5% to $1.4 million over the same period last year. Consolidated software and software-related revenues were up $230,000 or 4.1%, and consulting service revenues were up $1.2 million or 39%.

The gross profit increased 16.6% to $7.6 million, representing a 76.6% gross margin in the third quarter of fiscal 2019 compared to $6.5 million or 76.3% gross margin in the same quarter of last year. Cost of sales increased this quarter, about $300,000 compared to the prior year due mainly to growth in labor count as well as salary and benefit increases accounting for the majority of the change. As a percentage of revenues, cost of sales was relatively unchanged, decreasing slightly by 0.3% to 23.4%.

SG&A expenses were $3.1 million in the quarter or 31.1% of revenue, an increase of about $500,000 or 18.6% compared to $2.6 million or 30.4% of revenue in the third quarter of 2018. This increase in SG&A expense was primarily the result of wage and salary increases, from stock compensation, recruiting and hiring fees were included in there, and we had an increase in full-time CEO cost and the increase in head count in Lancaster and Buffalo make up the majority of that time.

Our research and development costs during the period, we incurred $1.1 million of R&D costs. Of that amount, we expensed $643,000, which was 6.5% of revenue. $422,000 was capitalized. Overall, we increased our R&D spend by $73,000 over the prior year. The expense portion of $643,000 increased by $135,000 or 26.6% compared to $508,000 or 5.9% of revenue in the third quarter of fiscal year '18.

Income from operations for the third quarter of fiscal '19 was $3.9 million, up $464,000 or 13.6% compared to $3.4 million in the year ago quarter. This was primarily the result of revenue growth outpacing the increase in cost and with the slightly higher gross margins that we saw.

Our provision for income tax in the quarter was $964,000, with effective tax rate of 25% compared to $991,000 in the prior year quarter and effective rate of 29.2%. The effective tax decrease is attributable to the new tax act, which became effective in January of 2018. Those lower taxes have allowed us to invest in the operations of the business. This year, we've seen a 4% to 5% decrease in our effective tax rate. This quarter's rate is just slightly higher than the 23% to 24% annual rate we anticipate for the fiscal year and that's really due to the third quarter being our highest income quarter of the year.

Net income increased by $483,000 or 20.1% to $2.9 million for the most recent quarter compared to $2.4 million in the year ago quarter. On a per share basis, net income was $0.16 per diluted share in the third quarter compared to $0.13 the prior year. EBITDA was $4.6 million this quarter, up 13% compared to $4 million a year ago.

Turning to the 9-month slides. We'll cover some top high-level items here. Consolidated net revenues year-to-date for 2019 were up 12.9% or approximately $3 million to $25.9 million compared to $23 million in the prior year. By division, Lancaster revenues were up 8.1% to $15.4 million, Buffalo revenues were up 20.5% to $6.9 million, and North Carolina RTP revenues were up 21.3% to $3.7 million. Our year-to-date consolidated software and software-related revenues were up $1.1 million or 7.8%, and consulting service revenues were up $1.9 million or 20.3%.

Gross profit increased $2.1 million or 12.3% with margins decreasing 0.4% to 74% from 74.4%.

SG&A expenses were 17.2%, up over the prior year, a combination of mainly salaries, recruiting and benefit-related costs as well as some software licenses and the effect of sales commissions on the increased sales. SG&A as a percentage of revenues year-to-date is at 33.2%, down from 34.5% last quarter, which is more in line with our annual expectations. R&D expense as a percentage for the year is at 7.3%. It was 7.8% last quarter and has now come back more in the 7% level, which is where we expect them to be year-to-date.

Looking at the tax provision this year. The effective tax rate year-to-date is 23.9% and that seems to be right in the range that we anticipate for the annual basis.

And one last comment on year-to-date information. Net income shows a decrease of $1.1 million. For those who followed SLP, you'll recall that last year, we recorded a $1.5 million tax benefit in the second quarter of fiscal '18 due to the change in the tax rates and reassessing our deferred taxes. That benefit was a onetime benefit and is the main contributor to the decrease in the year-to-date income compared to the prior year. The calculation we looked at diluted earnings per share was about $0.08 per share on last year's income.

Next, turning to Slide 11 for review of our quarter by -- revenue by quarter. This slide shows our revenue on a quarterly basis from fiscal years 2015 through the most recent quarter. It really illustrates the seasonality of the business. Our third quarter tends to be typically strongest quarter, and we'll see a drop-off in the fourth quarter coinciding with the slowdown in our client's purchasing project activities during the summer months.

On the next slide is our income by quarter. This data illustrates sort of a general track record of increases both year-over-year and sequentially through the first and third quarters with the fourth quarter typically being the lightest of the year.

On the next slide, we see a similar pattern of net income with the third quarter typically being the strongest. We've shaded the effect of the $1.5 million deferred tax benefit as it tends to skew the presentation without highlighting that difference.

As expected, if we go to the next slide, the diluted earnings per share follows the same pattern and tracks with net income.

And then turning to the EBITDA. Again, as expected, you'd see the seasonal patterns that would track with that, always sort of a trend upward.

This slide illustrates our revenue by region. Simulations Plus does reach businesses throughout the world. While the majority of our revenues are North American based, you can see that Asia and Europe are strongly represented, but we do see those markets as growing source of revenues for the company.

On the next slide, we provide on this chart a quarterly view of our cash and cash outflows for dividends and acquisitions and the impact of our cash over the last, basically, 5 years now. Beginning with the first quarter of fiscal year 2015, on the far left side, the blue bars at the bottom illustrate the -- our consistent dividend payout and then in the beginning of 2018, our Board increased dividend payment to $0.06 a share. That's where that tick upward is on there. And then moving up the chart, you'll see the red bars representing cash used for acquisition activities. We spent nearly $15 million over the past 4 to 5 fiscal years on those items.

Most notably on this slide has been our ability to return cash to our shareholders through consistent dividends, and we've been able to invest for future growth through acquisitions and maintain a healthy balance sheet and keep our cash balance up and not borrow any debt as we increase the value of the company. As of yesterday, our cash balance was at $12.9 million, and we do have a payout of about $1.7 million to make the next 2 months for acquisition payment on our RTP acquisition. But again, today we announced the -- with our earnings release that the Board of Directors has voted to distribute another $0.06 per share quarterly dividend payable August 1.

Now I'll turn the call back to you, Shawn.

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [4]

--------------------------------------------------------------------------------

Thank you, John. In summary, the quarter demonstrated the continued returns on our growth-related investments. Revenue growth outpaced increased spending and we enjoyed strong growth in operating margins, leading to increased profitability. Our revenue outlook is positive and tracking to higher end of our growth expectations for 2019. We continue to recruit additional staff in support of our service business and invest in our sales and marketing efforts and, finally, look to expand our international presence. As this quarter has demonstrated, the absolute dollar impact of these investments can be offset with revenue -- strong revenue growth. I'm encouraged with our progress and believe we are on track.

With that, let's open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Howard Halpern, and his question is, you mentioned a large customer that will include software, consulting services across your 3 divisions. Do you have any additional proposals outstanding that will use all 3 resources for your 3 divisions? And how does the new renewed licenses of regulatory agencies globally play into your sales and marketing strategy?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [2]

--------------------------------------------------------------------------------

Well, first of all, with regard to the cross-divisional sales activity, yes, we're certainly targeting our larger accounts and any other opportunities for a more broad sales process with them that covers all of our 3 divisions. This process is initiating. We've had some success to date. There certainly are other opportunities in the pipeline for these sorts of efforts. A lot of benefits that come from this. It's our ability to reach more broadly across our client organizations both in the preclinical and clinical sides of their organization, leverage visibility that we may have in those clients in one side or the other into a broader understanding of what we can offer in the less-impacted areas historically, raise our visibility up the organization chart within those clients. So yes, this is a key piece of our sales strategy, one that we've really just on the early ground-level efforts, good to see some results starting to come from it. I believe a lot of opportunity ahead of us in this regard.

Regulatory opportunities. As I said, there is a people benefit in terms of the movement of people in the industry much like our efforts to provide academic licenses for those institutions that leads to training using our products and as those individuals matriculate into industry, they're familiar with our products and gravitate to them. Beyond the people side, obviously, in many ways, more importantly, the regulatory use of our products is a strong signal to the commercial marketplace out there in terms of the impactful use of our products in the regulatory analysis and decision-making process and a validation of our software products that is sourced in the regulatory bodies using our products. So there is a tremendous validation and driving commercial customers from the visibility we get with our relationships on the regulatory side.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [3]

--------------------------------------------------------------------------------

Thank you. The next question, also from Howard, is what is the KIWI communication and collaboration platform stand in terms of customer acceptance and revenue growth potential?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [4]

--------------------------------------------------------------------------------

Yes. We had a release in the quarter as well on our KIWI product providing more functionality there. We continue to support it and have a loyal but small base of customers there. And they are responding very well. The marketplace as a whole is still one that is maturing, maturing in the sense of the functionality, the value that a KIWI product brings to the table. It's still being accepted and evaluated in the industry as a whole or those that have adopted that sort of product have typically built a solution in-house to meet their particular needs, SOPs, process that they have implemented internally. And like in large ERP sales cycles, part of the challenge is getting clients to recognize that while third-party products can be tailored to meet their specific needs, there is some acceptance on the clients' part of accepting a standard process that is embedded in a third-party solution.

And so the market is working its way through that evolution right now. We continue to support the KIWI product. We see an opportunity in the future. It contributes in terms of small incremental growth, contributes in terms of visibility and the comprehensive nature of our software portfolio that we're able to offer in those presentations to our clients. So there is value there and this revenue opportunity sits out in front of us still at this point in time.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [5]

--------------------------------------------------------------------------------

Thank you, Shawn. The next question also from Howard Halpern as a follow-up is what types of sales potential do you see in Europe? Will it tilt more towards software or consulting services?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [6]

--------------------------------------------------------------------------------

Well, it certainly will provide opportunity, increased opportunity on both sides of our business, both the software and consulting side. We see a good 18% contribution from Europe already to the company's revenues as a whole, so it's not like we are entering a brand new greenfield marketplace there. We do operate -- have supported that geography on the software side by conference attendance and sending our people there, the presence of staff on-site. It's not a high customer service application in the marketplace, but having presence there will help in that regard.

And so I see opportunity that will contribute on the software side, significantly on the consulting side. Presence of our consulting staff on the ground in Europe will allow for closer face-to-face interaction with our clients and reaching to new clients that perhaps we missed opportunities on in the past. So I believe it will contribute both. It certainly will have its impact perhaps a little bit more, greater on the consulting side, but it will be contributed on both sides of our business.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [7]

--------------------------------------------------------------------------------

Thank you. And we have one final question from Howard Halpern, Research Analyst at Taglich Brothers. What is your outlook for the recently released PKPLus version 2.5 and can -- and drive sales of your existing offerings?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [8]

--------------------------------------------------------------------------------

Yes. We had significant release of PKPLus just recently announced and is evidence of our continued process of listening to the marketplace and responding with enhanced future functionality in the product. Certainly, the market is large. We've got some entrenched competitors there. We're finding our niche in those clients, especially those that are utilizing crossover modeling opportunities, using both PBPK and PK/PD approaches and -- so given our strength on the PBPK side with GastroPlus, our PKPLus product enhances -- gives a client that's familiar with our application environment an opportunity to stay in their environment, if you will. And I think the opportunity for PKPLus will be enhanced as we integrate it more closely with our other existing platforms, something that will come in a bigger way potentially down the road with the refactoring project across our software applications.

So again it's a product that is early in its penetration to the marketplace for us. It is -- we are adding new users on a quarterly basis, and that's positive. It still is not of a size that is extremely material to the revenue growth today, but I think, as -- it has its place in, again, the breadth of our software portfolio that we're able to offer our clients down the road. And as we continue to add enhancements as we did, again, this quarter, I think its opportunity will only grow.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [9]

--------------------------------------------------------------------------------

Thank you. And we do have one audio question from [Adam Keller].

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

This is [Adam]. So I was wondering -- Simulations Plus has been growing top line revenue to over 20% per year. I was wondering at what point in time you expect this growth rate to decline and what you see as a stable long-term growth rate for the business.

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [11]

--------------------------------------------------------------------------------

Well, the historical growth rate of the company, while we've jumped up to 20% and above, if you look at those quarters where we've been in that level, it's usually been contributed to significantly because it was a year in which we were seeing the benefits of acquired revenue versus comparable years where that acquired company, be it Cognigen or DILIsym did not exist and so the revenue growth percentage basis was enhanced by those acquisition revenues. If you go back and you look at the company on an apples-to-apples basis and extract that acquisition revenue, the base business at each step of the way versus Simulations Plus alone and then with Cognigen and then the addition of DILIsym on an organic growth basis has grown 10% to 15% within that range pretty consistently over the years. Good results, more typically at the bottom end of that 10% to 15% range but within that range.

We are today, without any acquisition revenues, seeing our growth rate step up to the higher end of that range. This quarter was at 16% and our objective is to grow at the high end of the range and beyond that, to me what is a pretty aggressive adoption of modeling in Simulations in the marketplace out there. And so our opportunity from my perspective is one to continue to increase above the 10% to 15% annual revenue growth. Acquisitions are a part of our strategy, and when they come into play, they grow -- bump our growth rate up temporarily during that first year after an acquisition, and we look forward to that benefit as well. But on an organic basis, our sites are set pretty firmly on growing at the top end and beyond that 10% to 15% range and certainly don't look out and see a decline in the future ahead of us at this point in time.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [12]

--------------------------------------------------------------------------------

And we do have one from a written-in question from [Carl Hoffmann]. And his question is, you indicate that the payout ratio for the dividend is at 46%. Is the Board thinking about a targeted payout ratio going forward?

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [13]

--------------------------------------------------------------------------------

The Board, on a quarterly basis, in the process of approving the dividend, always takes a look and evaluates the value of the dividend in the marketplace, the investment community as well as the impact of it in terms of the operation of the company, always taking a look at it is the payout ratio, one of those metrics that is a part of that evaluation certainly. And so yes, it's a quarterly assessment that is had by the Board.

--------------------------------------------------------------------------------

Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [14]

--------------------------------------------------------------------------------

Thank you. And that completes the question-and-answer portion and also our conference call and webinar for today. If you missed any part of today's presentation, the replay will be available on our website, www.simulations-plus.com. Thank you, and have a great day.

--------------------------------------------------------------------------------

Shawn M. O'Connor, Simulations Plus, Inc. - CEO [15]

--------------------------------------------------------------------------------

Thanks, everyone.