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Edited Transcript of SLP earnings conference call or presentation 9-Jan-20 9:15pm GMT

Q1 2020 Simulations Plus Inc Earnings Call

LANCASTER Jan 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Simulations Plus Inc earnings conference call or presentation Thursday, January 9, 2020 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Kneisel

Simulations Plus, Inc. - CFO & Corporate Secretary

* Shawn M. O'Connor

Simulations Plus, Inc. - CEO

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Conference Call Participants

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* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Cameron Donahue

Hayden IR, LLC - Regional VP and Partner

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Presentation

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

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Good afternoon, everyone. On behalf of Simulations Plus, I welcome you to our First Quarter Fiscal Year 2020 Financial Results Conference Call and Webinar. Hosting the call today is Simulations Plus' CEO, Shawn O'Connor; and the company's CFO, John Kneisel.

An opportunity to ask questions will follow today's presentation. (Operator Instructions)

Before beginning, I'd like to remind everyone that with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of 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 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 level of productivity.

Further information on the company's risk factors are contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

With that said, I'd like to turn the call to the CEO, Shawn O'Connor. Shawn?

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

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Thank you, Cameron. Simulations Plus benefited from continued strong execution on our objectives and unanticipated client-driven accelerated timing on several projects to deliver growth that exceeded our planned targets in the first quarter. The 25% top line growth and $0.11 per share earnings represents a strong start to our fiscal year.

As most of you know, over the last 6 quarters, we have increased our investment in several key initiatives, most notably sales and marketing, with the goal of increasing our historical growth rate of 10% to 15% to a range of 15% to 20%. These investments yielded encouraging results as we navigated fiscal 2019. For the full year 2019, we delivered 15% growth; and in the fourth quarter, our growth rate was 20%. We improved on that further in the first quarter of fiscal 2020 delivering 25% revenue growth. This result was largely due to the acceleration of several projects at our North Carolina operation resulting in higher-than-expected revenue in the first quarter. While we are not anticipating growth to maintain these levels throughout fiscal 2020, these results validate our expectations of 15% to 20% growth for the full year.

Our increased revenue growth has been driven by both our software and consulting businesses. Software revenues grew 12% during the first quarter, with consulting growth for the quarter at 40%. Gross margins remained strong at 72%, slightly up on gross margins of 71% and 72% in the first and fourth quarters of fiscal 2019, respectively. This was achieved despite richer mix of lower-margin consulting revenues for the quarter in addition to higher-than-usual pass-through CRO revenues in our RTP division, which carry very low margins. This result supports our belief that we can maintain or improve overall gross margin despite changes in revenue mix and the cost of personnel through price management and operational efficiencies.

Demand remains strong across our software products and consulting services. Through our prior acquisitions of Cognigen and DILIsym as well as our more recent focus on recruiting more senior scientific consultants, we have built a more comprehensive array of expertise that is helping us capture additional consulting opportunities beyond our historical competencies.

It is appropriate this quarter to highlight the progress made in our RTP division. Its year-over-year revenue growth for the quarter was 88%, an incredible achievement for a division of only 17 staff. When we acquired DILIsym in fiscal 2018, its product portfolio consisted of the product DILIsym, the quantitative systems toxicology model for assessment of drug-induced liver injury; and NAFLDsym, a nonalcoholic fatty liver disease model. From that starting point, we have leveraged our quantitative system's pharmacology expertise with internal, grant-based and pharmaceutical company funding to significantly expand our therapeutic coverage and sources of revenue from this group. Today, model building efforts and revenue are sourced additionally from RENAsym, a model to assess drug-induced kidney injury; IPFsym, a model for idiopathic pulmonary fibrosis; and RADAsym, a model for acute radiation syndrome. This expansion has taken us into new therapeutic areas and new customers, expanding the market opportunity for our QSP expertise. As the models mature, software revenues from licensing the models will supplement the consulting service revenues, and more therapeutic expansion opportunities are on the horizon.

Our ongoing investments, specifically in sales and marketing, have increased our SG&A spending in absolute dollars. Due to the higher revenue growth, SG&A expenses as a percentage of revenue declined in the first quarter versus the fourth quarter of fiscal 2019 and was up 1% from the first quarter of fiscal 2019. We continue to forecast full year SG&A expenses at approximately 35% of total revenue. SG&A expense as a percentage of revenues will fluctuate quarterly based upon the seasonality of our revenues. Over time, we anticipate these expenses moving back towards our historical percentage of revenue at about 31% to 32% of revenue.

Turning to our first quarter results by division. In our Lancaster division, overall revenue was up 13% for the quarter. Software revenue grew 15% for the quarter versus last year. Consulting revenues were slightly down 2% for the quarter versus last year. With regard to Lancaster's detailed metrics, 69% of our revenue was from renewals, 12% from new licenses and 19% from consulting. Our renewal rates were 85% based on accounts and 98% based upon fees. Our licensed units of 235 were up 12% year-over-year. We added 16 new commercial companies and 22 nonprofit groups. We currently have projects with 26 companies and 9 funded collaborations.

Since the beginning of the fiscal year, we have announced 5 significant funded collaborations. These projects expand the functionality of our software offerings and further differentiate us within the industry. First, we entered into a new collaboration agreement with Bayer to advance the ADMET Predictor machine learning software for use with integrated drug discovery workflows. Collaboratively, we will develop improved structure and tautomer handling capabilities that will support data integrity across the different Bayer discovery platforms.

Second, we entered into a new funded collaboration with a large pharmaceutical company to enhance the PKPLus software. This collaboration followed a rigorous process where the pharmaceutical partner evaluated Simulations Plus and several competitors, ultimately selecting PKPLus as the pharmacokinetics, toxicokinetics modeling program to support the internal data platform that connects their global teams.

Third, we entered into a new funded collaboration with a large pharmaceutical company to modify the mechanistic oral absorption model in GastroPlus to support gastrointestinal disease research.

Fourth, we entered into a new funded collaboration with a clinical-stage biotech partner to develop an intra-articular delivery model in GastroPlus.

And finally, we entered a new funded collaboration agreement with a large pharmaceutical partner to develop the virtual bioequivalence trial simulator module for GastroPlus.

These collaborations continue our history of leveraging client input and funding to enhance and reduce the overall R&D costs associated with maintaining our industry-leading software products. Despite the flat service revenues in the division in the first quarter, collaboration closures year-to-date provide confidence in achieving our full year revenue targets. We ended the quarter with 41 full-time employees at our Lancaster division, up 1 from 40 in the prior quarter and up 4 from 37 last year.

In Buffalo, we achieved 16% revenue growth for the quarter. As a reminder, growth at the Buffalo division has increased from 8% in fiscal 2018 to 19% in fiscal 2019, and we have started fiscal 2020 with a solid quarter. Demand remains high for this type of PK/PD consulting services that we offer in the marketplace. In support of our growth expectations for the fiscal year, we had a successful recruiting quarter, adding 5 new employees to the consulting staff, a net of 4 with 1 attrition. While associated recruiting and onboarding costs impacted the division's profitability this quarter, we believe we are well positioned to meet our client demand and growth expectations for the fiscal year. We ended the quarter with 51 full-time employees at our Buffalo division, up from 49 in the prior quarter and up from 42 last year.

Our RTP division delivered that 88% revenue growth for the quarter. As I mentioned earlier, this division benefited from 2 significant projects that were accelerated at the customers' request to meet development and regulatory needs. The team at DILIsym deserves special credit for going above and beyond this quarter. As I mentioned in our fourth quarter call, this division is operating at full capacity in support of several large collaborations with -- for new QSP platforms in various disease areas and in addition to other client consulting projects. The request to pull forward 2 projects required additional hours and tremendous effort. This effort plus the comparison to a relatively modest year ago quarter drove the 80% -- 88% revenue growth in the quarter and was the key factor in our consolidated 25% growth overall.

While we cannot expect continued growth at these levels, we do expect continued significant growth. And to that end, we have recruited 2 additional to the team who are starting this and next month and continue to seek additional reinforcements for the group in North Carolina. Job well done, RTP.

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

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

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All right. Appreciate it, Shawn. Our consolidated net revenues for the first quarter of the fiscal year '20 we're up, as Shawn said, 25% or 24.8% or $1.9 million to $9.4 million compared to $7.5 million in the prior year period. By division, Lancaster's revenues were up 13% to $4.9 million, Buffalo's revenues were up 16% to $2.4 million and RTP revenues were up 88% to $2.1 million over the last period of year -- a year ago.

Gross profit increased 26.7% to $6.8 million, representing a 71.9% margin in the first quarter of fiscal year '20 compared to $5.3 million or 70.8% gross margin in the same quarter last year.

Cost of revenues have increased by approximately $443,000 compared to the prior year due to labor-related costs of approximately $399,000 and direct contract expenses of $81,000 for testing DILIsym and RTP. As a percentage of revenues, cost of revenues were down slightly to 28.1% of total revenues compared to 29.2% of total revenues in the first quarter of fiscal year '19.

SG&A expenses were $3.5 million or 37.4% of revenue in the first quarter of this year, an increase of approximately $794,000 or 29.2% compared to $2.7 million or 36.1% of revenue in the first quarter of '19. The increase in SG&A expense was primarily the result of increases in salary and wages and labor-related costs as the company has grown headcount to support revenue growth. In addition to labor, we saw an increase in year-over-year costs in professional fees, insurance expenses and directors' fees as the Board is now made up of all paid nonmanagement members.

Research and development costs for the most recent fiscal quarter were just over $1 million. Of this total, approximately $526,000 was expensed, and $507,000 was capitalized. Overall, we increased our R&D spend in the first quarter by -- of fiscal year '20 by $49,000 compared to the prior year period. The expense portion of $526,000 in the first quarter of '20 was roughly flat compared to $530,000 in the year ago quarter. However, as a percentage of revenue, R&D decreased to 5.6% from 7% in the first quarter of '19.

Income from operations for the first quarter of the year was $2.7 million, up $632,000 or 30.3% compared to $2.1 million in the year ago quarter.

Our provision for income taxes for the first quarter of '20 was $675,000, an effective rate of 24.7% compared to $486,000, an effective rate of 24% in the prior year. We expect our tax rate should probably be in the 23% to 25% range for this fiscal year.

Net income increased by $522,000 or 34% to $2.1 million in the most recent quarter compared to $1.5 million a year ago. On a per share basis, net income was $0.11 per diluted share in the first quarter compared to 9% (sic) [$0.09] the prior year. If you take off the rounding, EPS was up $0.027 from the prior year. As a percentage, fully diluted EPS was just up over 30%.

EBITDA was $3.4 million this quarter, up 25% compared to $2.8 million in the year ago quarter.

Turning to the next slide. This slide shows our revenue on a quarterly basis from fiscal year 2016 to the first quarter of '20, illustrating both the historical quarterly growth patterns and the seasonality of the business. Seasonality can be best seen using the 2019 purple bars. Our third quarter is typically our strongest quarter with the decrease in revenue in the fourth quarter that coincides with slowdown of our clients' purchasing in the summer months. Our first quarter this year again followed the upward trend, and revenues were strong enough to approximate the third quarter of '19, our historically highest quarter for revenue.

The next slide, we present income by quarter, which illustrates a consistent track record of increases, both year-over-year and sequentially through the first and third quarters, with the fourth quarter, as I said, typically the lightest in the year. As you can see, the patterns for quarterly revenue and quarterly income from operations have largely held true for a number of years.

On Slide 11, we see a similar pattern of net income with the third quarter typically being the strongest. We've isolated the impact of a $1.5 million deferred tax benefit in the second quarter of fiscal year '18 since it tends to skew the presentation without highlighting that difference.

On the next slide, diluted earnings per share follows the same pattern and tracks with net income. As I have mentioned earlier, fiscal '20 first quarter diluted earnings per share were $0.11, a reported $0.02 over the first quarter of the fiscal year.

And then turning to EBITDA on Slide 13, again, as expected, with seasonal patterns hold true with the overall trends moving upward, the typical seasonal -- seasonality between quarters.

The next slide illustrates our revenue by region. We're a global business with the majority of our revenues in the Western Hemisphere or the Americas. Approximately, 67% were in North America and 68% overall in the Americas. Asia and Europe each represents 16% total revenue for the quarter.

Turning to slide -- next slide. This slide illustrates the strength of our cash position with a quarterly view of our cash balance, which continues to increase even in light of cash outflows for dividends and acquisition over the last 5 years.

Beginning with the first quarter of fiscal year 2017 on the far left, the blue bars at the bottom illustrate our consistent dividend payout, approximately $900,000 per fiscal quarter through fiscal '17. Then at the beginning of '18, our Board increased the dividend payment to $0.06 a share, thereby returning approximately $1 million to $1.1 million in cash to our shareholders quarterly through the present quarter. Today, we announce that the Board has again continued the $0.06 quarterly dividend, and the next dividend payment date will be February 3.

Continue with the chart, the red bars represent cash used for acquisitions. Cash flows from operations have allowed us to invest our -- for future growth through acquisitions with excess cash while still maintaining a healthy balance sheet. Our reinvestments through acquisitions totaled nearly $15 million over the last 4 to 5 fiscal years while also returning more than $20 million to our shareholders through consistent cash dividend payments without taking on any borrowed debt.

In the next slide, our cash balance at the end of November was $12.6 million, which is up 10% compared to our fiscal year-end, 8/31/19. Our balance sheet is clearly stronger today than a year ago as a direct result of our increased earnings power, cash flow generation and prudent allocation of capital.

I will now turn the call back to you, Shawn.

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

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Thank you, John. In summary, this was a great start to the new fiscal year, building on the accelerated growth we delivered in fiscal 2019. Demand for our solution remains strong, and we are adding to our team to meet this demand. In addition, we have opportunities outside the United States to further accelerate our profitable growth. I look forward to reporting on our further progress in the coming months.

And with that, I'd like to turn it over and take any questions that you might have.

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Questions and Answers

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

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(Operator Instructions) As we poll for the questions, I'll just go through some of the written questions. The first one is, "Can you explain the nature of the increase of interest income ex increased interest rates for different cash management products?"

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

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John, I'll let you take that one.

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

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I was muted there. The interest income has come up over the last year as we've held a little bit more in balances. We've taken a fairly conservative approach on investments at this point in holding cash for potential uses that would help the company at this point. Shawn, any other comments?

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

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None in this regard, no.

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John R. Kneisel, Simulations Plus, Inc. - CFO & Corporate Secretary [5]

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Okay.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [6]

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The next question will be from Matt Hewitt of Craig-Hallum.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Congratulations on the strong start to the year. A couple of questions from me. First of all, the accelerated consulting deals, maybe walk us through how those came about. Are you essentially pulling those forward from Q2? Or is that a customer that came in and said, "Hey, we need this done this quarter?" Maybe just a little explanation there.

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

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Sure. Both are -- were existing clients and projects that were anticipated to run through multiple quarters going forward. And in each instance, the clients came to us, and we are limited in terms of our disclosure capability, but driven by regulatory and internal drug development plans within their organizations, requested accelerated delivery of the results of the efforts that we had signed up for. And so in a situation in which we also don't want to push off deadlines for the projects that we were working on, the team doubled up, if you will, and brought forward work efforts that had been planned over multiple months going forward into a short window of time in, basically, October, November time frame and really stood up and delivered results in support of the client.

I mean it speaks, I think, in both directions: a, the importance of the work that we do and the critical nature that it -- input that it provides the client either in their own internal decision-making or in the face of response to the FDA in terms of queries and interactions. And also, and we're very proud of the group in terms of stepping up and recognizing the importance to the client and doing what was necessary in order to fulfill the needs there. Very strong effort by the team.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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That's great. And then you had a strong quarter of hiring, adding people at a number of the facilities. I'm just curious, how much do you have left to go yet this year from a hiring perspective?

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [10]

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Matt, it's an ongoing process. If our expectations are to continue to grow consistently going forward. Recruiting is an every day, every week, every month, every quarter endeavor. But certainly this quarter, especially in the Cognigen group out of Buffalo, we were able to take advantage of opportunity in terms of there being candidates, good candidates, out there that fit our needs and brought them in.

And so as we look out over the next couple of quarters, a, it's -- we're not dependent upon that level of hiring to support our near-term needs. At the same time, should candidates come forth that are keepers, we will not hesitate to pursue them. Balancing our capacity against the work effort that's in front of us, but we have over $6 million in backlog of projects in that division. And so given the ramp-up time to -- it takes to bring a consultant on board and get them productive, we're certainly in a position where we've got client work effort available to assign new people to.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Got it. All right. Well, good luck as you continue to search for more consultants. I guess the last question for me. On the RENAsym, maybe how is that product progressing? And when do you anticipate a launch?

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [12]

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The RENAsym is there. We're seeing both consulting revenues, consulting project opportunities as well as licensing opportunities in that space. So it's starting to kick off now.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [13]

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The next question on the written questions is from Howard Halpern of Taglich, "Congratulations on a great quarter. Can you quantify the amount of accelerated revenue from the 2 clients in the quarter? And was that expected to occur in second quarter of 2020?"

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [14]

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Howard, as I mentioned before, the projects were in place and anticipated to flow over multiple quarters. So some of that is drawing it in from the second quarter. Don't want to get into disclosing specific client revenue streams. We -- without these 2 accelerations, we would have had a good quarter. It would have been in that 15% to 20% range, not up to the 25% range. So that gives you a little bit of a feel.

We're scrambling. And with the backlog that we have, it doesn't mean that what came forward out of the second quarter into the first quarter can't be filled in and replaced in the second quarter. Hence, our longer-term expectations of the year being in at 15% to 20% is still our expectation.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [15]

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A follow-up question from Howard, "Does the first quarter fiscal '20 results validate your prior investments to drive revenue growth while also improving and maintaining the gross margin as well as the consulting services on-demand?"

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [16]

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Yes, if I understand the question. I think, first quarter results accelerated projects aside for the moment, we've continued the path that we initiated and start to come to fruition in 2019 in stepping up the revenue growth and believe that has been driven by our investments in several initiatives, both on the software side as well as the consulting side. In terms of sales and marketing, tweaks and changes and investments that we're making, hiring senior scientists that have a little bit more business development DNA in their capability and focusing the organization in terms of these goals. And so we are seeing that continue and have started the year with great results in that regard.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [17]

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And 2 other follow-ups from Howard. "What is the significance of your collaboration agreement with Bayer AG?"

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [18]

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I do think there's several sort of angles on the collaboration there. One, ADMET Predictor and the data mining -- machine learning, I should say, capabilities in that product are recognized by the industry, in this case, Bayer, in terms of being their tool of choice in discovery applications. And secondly, their collaboration with us to add this utility to the product further embeds our software in a very significant client. You see, the renewal rates at 98% this quarter for our software business is very indicative. 98% on fees is very indicative of the stickiness of our software application in the industry once it gets into our clients' hands. And this is the way -- one of the ways in which that stickiness comes about.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [19]

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And then the final question is, "How are your efforts in Europe progressing? I know we announced we had, I believe, 3 or 4 employees that are based there starting in the fourth quarter call. If you can just expand upon that growth as far as one of the areas that we've discussed as far as an opportunity for future growth going forward."

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [20]

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Sure. No fifth employee in Europe to announce this quarter. We remain at the 4 that we entered the fiscal year with. Obviously, those consultants are engaging both in terms of project work as well as integrating themselves in terms of the community and supporting the conference attendance and relationship builds with clients there in Europe. I still believe that this is -- strongly believe this is a tremendous opportunity for us down the road that is yet to be paying dividends but will in the near term.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [21]

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Well, thank you, everyone. It appears there's no further question at this point. This concludes today's conference call and webinar. If you missed any part of today's presentation, a replay will be available on our website at simulation-plus.com.

Thank you and look forward to speaking with you in the second quarter.

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Shawn M. O'Connor, Simulations Plus, Inc. - CEO [22]

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Thanks, everyone.