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Edited Transcript of SLP earnings conference call or presentation 13-Nov-19 9:15pm GMT

Q4 2019 Simulations Plus Inc Earnings Call

LANCASTER Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Simulations Plus Inc earnings conference call or presentation Wednesday, November 13, 2019 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

* Shawn M. O'Connor

Simulations Plus, Inc. - CEO

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Conference Call Participants

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* 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 Fourth Quarter and Full 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'd like to remind everyone for this -- that with the exception of historical information, the matters discussed in this presentation are forward-looking statements and 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 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, I'd like to turn the call over to Shawn O'Connor. Shawn?

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

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Thank you, Cameron. This was a very strong quarter for Simulations Plus, giving us a positive conclusion to a record year. 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 and the year as a whole.

We began the year with an objective of increasing our revenue growth with investments and several key initiatives. That objective was to increase our historical growth rate of 10% to 15% to consistent performance in the 15% to 20% range. Our fourth quarter revenue growth of 20% and full year growth of 15% demonstrate success in this objective.

Our increased revenue growth has been driven by both our software and consulting businesses. Software revenues grew 21% during the fourth quarter, with consulting growth for the quarter at 19%. And this revenue growth acceleration has been achieved while maintaining gross margin performance at 73% in fiscal year '19, equivalent to our gross margin performance in fiscal year '18, despite the fact that consulting revenues grew from 43% to 45% of total revenues.

Demand is strong across our software products and consulting services. Funded collaborations adding new functionality to GastroPlus have expanded its market opportunity. We exit the year with a strong backlog for our consulting practice. Our QSP platform expansion into new disease areas as our DILIsym team working at full capacity to support this platform development as well as client-driven consulting projects.

We have made significant progress in each of our key initiatives: First, our investment in sales and marketing continues to increase with the addition of sales resources as well as senior scientific consulting staff with business development acumen; second, our consulting practice capacity has expanded through successful recruiting efforts resulting in a 21% increase in consulting staff for the year; third, we doubled our consulting resources in Europe this quarter, and while still relatively small at 4 people, will continue to be a source of growth for us.

These investments have put pressure on our SG&A spending, which increased in the fourth quarter to 39% of revenue. For the year, SG&A expense came in at 35% of total revenue where we have historically performed closer to the 32% to 33%. The largest increase was in employee-related costs in support of our increase in revenues, including recruiting costs, and as anticipated, commissions increased with higher sales volume. I believe that while the SG&A expense as a percentage of revenues will fluctuate quarterly based upon the seasonality movement of our revenues, we will see it move back towards historical percentage of revenue rates in the long run.

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

Turning to our fourth quarter fiscal results by division. In our Lancaster division, overall revenue was up 27% for the quarter and 12% for the year. Software revenue grew 22% for the quarter and 10% for the year. Consulting revenue grew 55% for the quarter and 24% for the full year. We had a successful quarter in new commercial customer licenses, which drove the higher-than-normal software revenue growth for the quarter.

With regard to Lancaster's detailed metrics, 61% of our revenue was from renewals, 22% from new licenses and 17% from consulting. Our renewal rates were 86% based on accounts and 94% based on fees. Our licensed units of 241 were up 14% year-over-year. We added 20 new commercial companies and 13 nonprofit groups. We have projects in 27 companies and 500 collaborations.

Our service business grew nicely in the quarter, with a combination of consulting projects for customers and collaborations on future development with GastroPlus platform. During the quarter, we announced 2 significant collaborations: First, a funded collaboration with a clinical-stage biotech partner to develop an intra-articular delivery model in GastroPlus that will allow for efficient evaluations of IA injection strategies; secondly, a funded collaboration agreement with a large pharmaceutical company to develop the virtual bioequivalence trial simulator module for GastroPlus to evaluate population and formulation variability on the bioequivalence of different products. These collaborations are the latest examples of our collaborations with companies and regulatory bodies to develop technology in GastroPlus to extend its functionality and market opportunities. We ended the quarter with 45 full-time employees at our Lancaster division, down 1 from 46 in the prior quarter and up 6 from 39 last year.

Buffalo achieved 14% revenue growth for the quarter and 19% for the full year. This has been a year of strong growth for this division, more than doubling last year's revenue growth rate of 8%. Demand remains high for this type of PK/PD top consulting services that we offer in the marketplace. And our successful recruiting of additional key scientific resources to our capacity has allowed this division to step up in its contribution to our overall success.

We recently announced the promotion of Jill Fiedler-Kelly to President of this division. Ms. Fiedler-Kelly was one of the founders of Cognigen along with Ted Grasela. Jill's knowledge and experience in the PK/PD community and track record of leading our consulting service practice positions her well to successfully assume this new role. Additionally, key leadership additions in this division provide her with an excellent team to lead the division forward.

Finally, Ted Grasela remains with the company to provide continued counsel to Jill as well as to continue to deliver support to our key clients. We ended the quarter with 49 full-time employees at our Buffalo division, up from 45 in the prior quarter and up from 39 last year.

Our Research Triangle Park division delivered 13% revenue growth for the quarter and 19% for the full year. The division is operating in full capacity in support of several large collaborations for the QSP platform in various disease areas in addition to client consulting projects. The latest collaboration effort with a large pharmaceutical company is for the development of a QSP platform for acute radiation syndrome. This is a multiyear project that link the division's other collaborations, is funded in its initial build and upon completion, we retain the platform IP for license and consulting services with other clients. We ended the quarter with 17 full-time employees at our RTP division, unchanged from the prior quarter and up 1 from 16 last year.

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

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 [3]

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Thanks, Shawn. Looking at the income slide here for the fourth quarter versus last year, our consolidated net revenues for the fourth quarter of our fiscal year '19 were up 20%, as Shawn indicated, or about $1.3 million to $8 million compared to $6.7 million for the prior year.

By division, Lancaster's revenues were up 27% to $4.2 million, Buffalo's revenues were up 14% to $2.4 million and RTP revenues were up 13% to $1.4 million over the same period last year.

As Shawn said, consulting -- consolidated software and software-related revenues were up $654,000 or 21%, and consulting service revenues were up $684,000 or 19% -- actually, $654,000 on the software, sorry about that.

The gross profit increased 25.5 -- increased 25.5% to $5.7 million, representing a 71.5% gross margin in the fourth quarter fiscal year '19, compared to $4.6 million or 68.3% gross margin in the same quarter last year.

Cost of sales increased by approximately $171,000 compared to the prior year, due mainly to growth in staff wages of approximately $361,000, which accounted for the majority of all the change. The increase was offset by a reduction in direct contract expenses of about $170,000.

As a percentage of revenues, cost of sales were down slightly to 28.5% of total revenue compared to 31.7% of total revenue in the fourth quarter of fiscal '18. SG&A expenses were $3.2 million or 39.6% of revenue in the fourth quarter of fiscal year '19, an increase of approximately $950,000 or 42.7% compared to $2.2 million or 33.4% of revenue in the fourth quarter of '18.

The increase in SG&A expense was primarily the result of increase in stock compensation expense, increase in recruiting fees and the increased headcount in Lancaster and Buffalo. We also saw increases in accounting and consulting fees.

Our research and development costs for the most recent fiscal quarter were $1.04 million. This is a total of -- of this, $603,000 or 7.5% of revenue was expensed and $437,000 was capitalized. Overall, we increased our R&D spend in the fourth quarter of '19 by $348,000 compared to the prior year. The expense portion of $603,000 increased by $287,000 or 64 -- or 42.6%, representing 7.5% of revenue compared to the $437,000 or 6.5% of revenue in the fourth quarter of the prior year.

Income from operations for the fourth quarter of fiscal year 2019 was $2 million, up $51,000 or 2.7% compared to $1.9 million in the year ago quarter.

Our provision for income taxes for the fourth quarter of fiscal year '19 was a tax benefit of $72,000 and effective benefit rate of about 3.6%, compared to income tax expense in the prior year quarter of $503,000 or an effective rate of 27.3%. The change in provision for income tax is mainly attributable to the effect of stock compensation deductions from stock option exercises and sales by optionees.

With the increase in our stock price over the last 6 months of our fiscal year, a number of employees elected to take advantage of unrealized profits in their incentive stock portion of their compensation packages, which created corporate tax deductions during the quarter of approximately $1.6 million.

Net income increased by $721,000 or 53.9% to $2.1 million for the most recent quarter compared to $1.3 million a year ago in that quarter. On a percentage -- on a per share basis, net income was $0.11 per diluted share in the fourth quarter of fiscal year '19 compared to $0.08 in the prior year period.

EBITDA was $2.7 million this quarter, up about 3% compared to $2.6 million a year ago.

Turning to the next slide for the full year's financial results. Net revenues for the full fiscal year of '19 were up 14.5%, an increase of $4.3 million or 34 -- to $34 million compared to $29.7 million in fiscal 2018.

By division, Lancaster revenues were up 12% to $19.6 million, buffalo revenues were up 18.6% to $9.3 million and North Carolina RTP revenues were up 19% to $5.1 million.

Our full consolidated -- full year consolidated software-related revenues were up $1.8 million or 11%, and consulting services revenues were up $2.4 million or 19%.

Gross profit for the fiscal year 2019 increased $3.3 million or 15.1% to $24.9 million, up 21 -- up from $21.7 million. Gross profit margin also increased from 73.1% for fiscal year '18 to 73.4% million for fiscal year '19.

SG&A expenses were $11.8 million for the fiscal year, up 23% over the prior year, due primarily to the increased staffing levels and affected salaries, recruiting and benefit-related costs.

We also saw increased expenses from sales commissions on increased revenues as well as increased director consulting, accounting and auditing fees.

SG&A as a percentage of revenues for fiscal year '19 was $34.7 million, up from $32.3 million for fiscal year '18. R&D expense was $2.5 million or 7.4% of revenue for FY '19, in line with the 7% we expected compared -- and compared to $1.8 million or 6% of revenue for fiscal year '18.

The tax provision for fiscal year '19 was $2 million, an effective rate of about 18.7% compared to a $1.2 million provision for an effective rate of 11.9% in the prior year. Our 2019 effective rate was lower than anticipated based on the deductions we received from stock option activity discussed earlier, and anticipate our effective rate will be in the 21% to 24% range for fiscal year 2020, but may see fluctuations depending on option exercises and other factors.

Also, as a reminder, we recorded a $1.5 million onetime tax benefit in the second quarter of fiscal '18 due to the change in the tax rates and the reassessment of our deferred taxes.

Lastly, our net income for fiscal year 2019 was $8.6 million or $0.48 per diluted share compared to $8.9 million or $0.50 per due diluted share in fiscal '18. The year-over-year increase -- or decrease in net income and EPS is primarily in the tax line and as a result of the onetime tax benefit in 2018 that we just discussed.

Turning to the next slide, we review our revenue by quarter. And this slide shows our revenue on a quarterly basis for fiscal year '15 to '19, illustrating the seasonality of the business. Our third quarter is typically the strongest quarter, with the decrease in revenue in the fourth quarter that coincides the slowdown of our clients' purchasing during the summer months. Our fourth quarter of this year was our strongest fourth quarter we have seen and actually exceeded our first quarter revenues.

Consolidated operations income, on the next slide we present this income by quarter, which illustrates the consistent 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. As you can see, the patterns for quarterly revenues and quarterly income from operations have largely held true for a number of years, including fiscal year '19.

On the next slide, we'll see a similar pattern of net income, with the third quarter typically being the strongest. We isolated the impact of the $1.5 million deferred tax benefit in the second quarter of fiscal year '19, sort of the light purple section on the screen, as it tends to skew the presentation without highlighting that difference.

Looking at consolidated earnings per share, as expected, diluted earnings per share followed same pattern and tracking with -- track with net income.

Next slide covers EBITDA and -- as expected, the seasonal patterns hold true with upper ward and -- upward and typically seasonality between the quarters.

This slide illustrates our revenue by region. We're a global business, and the majority -- though the majority of our revenues are in North America, approximately 64% for fiscal year '19, both Asia and Europe each represented 18% of our total revenue.

This slide provides a quarterly view of our cash position and cash outflows for dividends and acquisitions and the impact of cash over the last 5 years. Beginning with the first quarter of fiscal year '15 on the left side, the blue bars on the bottom illustrate our consistent dividend payout. Approximately $800,000 to $900,000 per fiscal quarter. Then in the beginning of 2018 -- fiscal year 2018, our Board increased the dividend payment to $0.06 a share, returning approximately $1 million to $1.1 million of cash for our shareholders on a quarterly basis.

The red bars represent cash used for acquisitions. We've invested for future growth through acquisitions, while maintaining what we believe is a very healthy balance sheet. We've maintained a cash balance and not needed to borrow to increase the value of the company.

We've been able to spend nearly $15 million over the last 4 to 5 years on acquisitions. At the same time, we've been able to continually return dividends to our shareholders.

Turning to the next slide. Just some of the balance sheet statistics. As of August '19, our cash balance was $11.4 million, which is up 22% compared to $9.4 million the prior year. Our balance sheet is clearly strong today than a year ago as a result of our increased earnings power, cash flow generation and prudent allocation of capital.

I'll now turn it back to you, Shawn.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [4]

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John, this is Cameron. Do you mind just walking through this last slide. For some reason, there seems to be a technical difficulty with Shawn's line?

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

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No, not at all. So I'll just -- you guys have seen this a little bit before this, looking at the...

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

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My apologies. My apologies. I'm back. I'm back. I leaned over and yanked -- my earphone plug out. I'm -- apologies for that.

In summary, for the year, we finished the year with a very strong fourth quarter. And for the full year, we've achieved our objective of increasing our revenue growth, while maintaining good gross margins and overall profitability.

We have made investments, which should support the continuation of these trends into fiscal year '20. And demand for our solutions remains very strong. And we've been very successful in terms of adding to our team of consulting and staff overall to meet this demand going into the next year.

With that, Cameron, let's turn it over to the questions.

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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)

And while we wait for any additional live calls, we will go through some of the questions that were written in. The first question we have from Howard Halpern is, can you explain on the potential [model] size, the 2 GastroPlus collaborations announced in September and October of 2019?

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

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Sure, Howard. The 2 collaborations are just initiating. And so the timing in terms of the opportunity, while in its first instance in terms of their funding, the R&D effort begins with projects, the opportunity in terms of follow-on market for those 2 endeavors is still out there into the future. But the collaboration with the biotech company with the IA injection strategies is something that probably rolls into the feature set of GastroPlus as opposed to the second collaboration with a large pharma company, the virtual bioequivalence simulator, which will become more likely than not a separate module. And therefore, its revenue potential down the road will be more quantifiable as a module additional sale, additional revenue in the marketplace.

I think at this point in time, while we see very good support from the first collaboration in terms of continuing to keep GastroPlus at the cutting-edge with a host of features and models and capabilities that continue to maintain its leadership position in the marketplace. And -- with the second, in terms of providing incremental module revenue opportunity for the product going forward. I don't know that we're looking at adding significant market opportunity or additions, but it certainly solidifies our position.

And the second one, the module probably adds to our market size down the road, but not something that we can quantify at this point in time.

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

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The next question is, what is your hiring plan for fiscal year 2020? How is the current market for hiring additional scientists and/or marketing professionals?

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

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Yes. Last year, we -- I think our overall headcount growth was about 18% adds, about the size of our revenue growth. I think, going forward in the future, we'll try to keep that headcount growth lower than overall revenue growth and seek to contribute to growing the business faster than headcount growth with efficiencies that we can achieve internally. But I would anticipate that they will track to or just below our revenue growth as we go into the forward years.

The marketplace for professionals on the scientific side, on the consulting side, remains very competitive. The skill sets that we seek in the marketplace are highly valued both by our clients who have internal departments for modeling and simulation as well as other consulting practices. And therefore, it remains a very competitive marketplace. I think we've been very successful in presenting the benefits and value to scientists and they're joining the team here at Simulations Plus, both in terms of what they can contribute to our clients as well as their internal development and expansion of their skill sets while joining the team here and working for us.

On the sales and marketing side, I characterize it as good people, there's always a competitive market for good people. But when presented a good opportunity, sales and marketing people tend to seek out places where they believe that they can be successful, and that usually means companies that are growing and successful in the marketplace. And so well, it is as well a competitive market, we fare very well in our search there.

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

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Next question is, looking out at the next couple of years, what should be the primary growth drivers? And what level of top line growth can be achieved?

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

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The growth drivers in our business really starts with the expansion and application of modeling and simulation techniques and approaches in the pharma community and -- as supported and done so by the regulatory community as well. There's a very good foundation today in terms of where it's applied and how it's used, and that is still a growing market. But incremental to that is where do we apply modeling and simulation in new areas in the direct development cycle, either early stage of discovery and clinical trial, a portion of the development cycle, or down the road in terms of applications that may reach out to real-world data and/or precision medicine types of applications.

And I would say that the activity level is very high in terms of searching out new applications. This is our -- as we talk today, it's sort of the end of our busy season in the sense of conferences and trade shows, meetings, and having attended and observed the enthusiasm in the stretch and the search for new applications of modeling and simulation in our world is very robust right now. So underpinning our growth into the future is that growth that's taking place in our marketplace of expanding applications of modeling and simulation.

Obviously, behind that and in support of that into our success will be dependent on our ability to continue to grow and be there with tools that are right and functional and in support of our clients, both in terms of the tools -- software tools that we license to them as well as the support that we provide them with our skilled consultants. And so those are the underlying drivers in terms of what will be our top growth going forward. While we don't give specific guidance in that regard, I have pointed out, come back to time and time again each quarter with our objective here of stepping up our growth rates into the 15% to 20% range on a consistent basis. And I think we've been very successful in demonstrating our ability to do that as we close out the year here and look forward to continuing that charge into our next fiscal year.

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

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Our next question is, we've noticed that there will be no contingent consideration imputed interest recorded in the Q4 '19. Is that correct? And should there be no more imputed interest reported going forward, can you please maybe give a quick overview of what that is? And then, I guess, following with a question.

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John R. Kneisel, Simulations Plus, Inc. - CFO [8]

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Sure, I can handle that, Cameron. The contingent consideration and -- that created the imputed interest was from the acquisition of DILIsym being recorded at a lower than full price on some earn-out calculations. That created the imputed interest, and now that has all been picked up through the end of what was basically the third quarter time period. So going forward, there'll be no more imputed interest on that calculation.

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

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Thank you, John. The final question we have as far as my list of questions is, can you talk about the overall landscape you're seeing for potential M&A opportunities?

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John R. Kneisel, Simulations Plus, Inc. - CFO [10]

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Sure. I mean it's something that I devote a good part of my time to. It's a population of company potential targets out there that stands, both our software -- the nature of both the software nature as well as consulting opportunities and sometimes combinations that are out. They span companies that are resident headquartered here in the U.S. and some of them maybe in other territories, I've spoken before, in support of our expansion and building a bigger presence in the European marketplace that while we can successfully and are moving one by one in terms of hiring staff in that geography, an acquisition might help us in terms of stairstepping that process a little bit more quickly.

It's a marketplace where they're very successful companies and attractive products and services out there. And we certainly are devoting an effort to identify and pursue opportunities that might exist out there. Nothing to report at this time at all in that regard, but do see it as the component of our strategy going forward and look forward to that point in time in which we may be able to present another opportunity as company has successfully grown itself over the last number of years with the addition of Cognigen and then DILIsym as acquisitions that turned out very successful for the company and shareholders in the past. And we look forward to continuing that trend going forward.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [11]

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It appears we have no additional questions at this point. Shawn, I'll turn the call back over to you for closing comments.

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

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Yes. Just in closing, I believe we've had a very good close out of our fiscal year. The page turns quick. And we will be back with you after the new year with reporting of our first quarter and look forward to doing so. And I appreciate your interest in SLP and following of the company. Thank you much.

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

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This concludes today's conference call and Webinar. If you missed any part of today's presentation, the replay will be available at our website, www.simulations-plus.com. Thank you, and have a great day.