Simulations Plus, Inc. (NASDAQ:SLP) Q1 2024 Earnings Call Transcript
Simulations Plus, Inc. (NASDAQ:SLP) Q1 2024 Earnings Call Transcript January 3, 2024
Simulations Plus, Inc. misses on earnings expectations. Reported EPS is $0.09591 EPS, expectations were $0.11. SLP isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Simulations Plus First Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Tamara Gonzalez from Financial Profiles. Thank you. Ms. Gonzalez, you may begin.
Tamara Gonzalez: Welcome to the Simulations Plus first quarter fiscal 2024 financial results conference call. With me today are Shawn O'Connor, Chief Executive Officer, and Will Frederick, Chief Financial Officer and Chief Operating Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call.
There can be no assurances that these will actually take place. So, our actual future results could differ significantly from these statements. 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'll turn the call over to Shawn O'Connor. Shawn?
Shawn O'Connor: Thank you, Tamara. Good afternoon, everyone, and thank you for joining our first quarter fiscal 2024 conference call. Results for the first quarter of fiscal 2024 played out as anticipated. We delivered solid revenue growth of 21% and diluted earnings per share of $0.10, in-line with our guidance for the full year. Our team performed very well in what is still a softer environment for our biotech and pharmaceutical clients. A few notes on the background behind the results. As our clients closed out their fiscal years, we saw the usual spend before you lose in 2023 activity, a rush to use allocated budgets before the year-end. Even though the spend fell short of previous year-end highs, we were encouraged that it was greater than what we saw last year.
We also gained insight into our clients' budgets for fiscal 2024. Some have more aggressive budgets, while others have more cautious as the industry's portfolio of drugs that are going off patent looms on their horizon, causing them to be more conservative on spending. Funding for biotech continued to show signs of life, but again, was still well below the funding levels of two to three years ago. Importantly, our leadership in AI and predictive analytics continue to accelerate discovery efforts and improve clinical outcomes for our clients. For context, we have been utilizing AI techniques and approaches in our solutions since our beginning. As AI technologies have evolved, we have enhanced our AI solutions and experienced the benefits that can be harnessed with better data access, algorithm training, and predictive accuracy.
Our tenure in serving the drug development industry has provided significant access to private and public data necessary to perfect and refine predictive algorithms. Our partnerships in collaborations with industry leaders and regulatory agencies is unmatched and provides us with ongoing means to continue this into the future. Moving to our Software segment's performance, Software revenues increased 25% for the quarter, reflecting good renewal activity and converting an active and strong pipeline. Our Physiologically Based Pharmacokinetics, or PBPK, business unit had a strong quarter. Revenues increased 27% for the quarter, reflecting some spillover from the fiscal fourth quarter 2023 and a diminishing impact from small biotech client renewals that previously weighed on results.
GastroPlus was referenced in 21 peer-reviewed journal articles and the PBPK business unit added six new customers. The team also booked nine commercial client upsell. In our Clinical Pharmacology and Pharmacometrics, or CPP, business unit, revenues declined 1%. Biotech churn still exists in CPP, where we lost eight customers whose total revenue was only $120,000. In total, CPP added nine new customers and had 10 customer upsells in the quarter, with one renewal shifted to the second fiscal quarter. Our Cheminformatics business unit saw revenues increase 3% in the first quarter. There were two non-renewals, one from a small biotech and one renewal that was delayed for renewal later in calendar 2024. The team booked five upsells during the quarter and added two new customers.
In our Quantitative Systems Pharmacology, or QSP, business unit, revenues increased 219%, reflecting a new license to an existing customer for the QSP oncology modeling platform. No new customers were added during the quarter and the team booked one upsell. We were pleased with this quarter's results, but given the large per license dollar amount and smaller client volume associated with this business, quarterly outcomes can be lumpy. Looking at our Services segment, revenues grew 17% during the first quarter. Services had a good start to the fiscal year as the momentum out of fiscal 2023 continues. Overall, services saw more choppiness than usual in project flow due to data and other client-related delays that impacted project deliveries. Services revenues in our CPP business unit were up 12% in the first quarter, a good outcome.
CPP completed 67 projects in the quarter and continued its momentum from the end of the fourth quarter with excellent bookings. In our QSP business unit, Services revenue grew 100% for the first quarter, including the benefit from the Immunetrics acquisition. The team completed 27 projects during the quarter, with one cancellation from a large client that negatively impacted overall backlog. Services revenue in our PBPK business unit declined 12% in the quarter as revenues were negatively impacted by client-related data delays and affected project deliveries and milestones. During the quarter, the team completed 63 projects. Given the pipeline, the outlook for PBPK looks solid for the year. The Immunetrics integration continues to go well. Immunetrics has an active pipeline, reflecting inherited leads and new leads sourced in the SLP client base post acquisition.
Overall, the QSP team is executing very well and is collaborating on projects. Before turning the call over to Will, I'd like to call your attention to a separate release that we issued simultaneously today announcing four key leadership appointments, each effective today. First, Will Frederick is assuming the additional role of Chief Operating Officer. Will has been with Simulations Plus since 2020 and has demonstrated excellent operational leadership over this time. In his new role, Will now oversees operations for all of our business units. Second, we're pleased to welcome Dan Szot to the Simulations Plus team in the new role of Chief Revenue Officer. Dan has over 20 years of enterprise sales experience across all phases of drug development in large organizations.
In this key role, Dan oversees the sales and marketing teams to identify collaborative cross-selling opportunities and enhance productivity. Third, Josh Fohey is transitioning to Senior Vice President of Operations and will leverage his customer insights to provide client-focused leadership across all business units. And finally, Dr. Sandra Suarez-Sharp has been promoted to President, Regulatory Strategies. Sandra is responsible for expanding our Regulatory Strategies business unit, a critical fast-growing component of our overall services offer. These appointments recognize the experience and proven contributions of each of these leaders. Importantly, we share a common vision of always putting our clients first as the best possible way to ensure long-term sustainable growth.
I'd also like to take a minute to thank those of you who attended our first Investor Day in November. We had a great turnout and the feedback has been positive. In addition to a deep dive into our business, we also outlined our new organizational structure. With this new structure, we reorganized the companies we acquired over the years into five business units that correspond to the scientific domains in the drug development process in which we have expertise. This structure aligns with how our clients do business with us and encourages cross-selling and collaboration. Our team continues to deliver tremendous value to our clients, providing customized services and easy-to-use software offerings, each of which is at the core of our business model.
And with that, I'll turn the call over to Will.
Will Frederick: Thank you, Shawn. We had another strong quarter, with total revenue increasing 21% to $14.5 million, with Software revenue up 25% and Services revenue up 17%. Software revenue represented 52% of total revenue for the quarter. On a trailing 12-month basis, Software revenue increased 21% and Services revenue increased 9%. As we've mentioned in the past, our first quarter tends to be our lowest revenue quarter due to seasonality, and this year is no different. We are anticipating that we will see seasonally higher revenues in the remaining quarters of fiscal 2024 as we have had in the past, resulting in higher profitability in the remaining quarters of our fiscal year. Total gross margin for the quarter was 68%, reflecting higher cost of revenues in the Services segment as a result of updated reporting changes.
Software gross margin increased to 87% from 85% last year, while Services margin decreased to 47% from 70% last year, primarily due to a shift from previously reporting multiple cost items in SG&A expense before the reorganization and now separately reflecting them in cost of revenues for Services. Gross margin for the trailing 12 months through this quarter were approximately in-line with the trailing 12 months ending first quarter of fiscal 2022. I'll go into more detail on how our reorganization impacts our expense reporting in just a few minutes. Turning to Software revenue by business unit for the quarter, PBPK represented 52% of Software revenue, CPP was 20%, Cheminformatics was 15%, and QSP was 13%. For the trailing 12 months, PBPK represented 57% of Software revenue, CPP was 18%, Cheminformatics was 18%, and QSP was 7%.
For the quarter, our customer renewal rate increased to 100% based on fees and increased to 84% based on accounts. For the quarter, average revenue per customer increased to $79,000 from $68,000. For the trailing 12 months, our customer renewal rate remained at 93% based on fees and decreased to 83% based on accounts. For the trailing 12 months, average revenue per customer increased to $93,000. The lower account renewal rates are still primarily driven by non-renewals from smaller biotech customers, but we've been able to maintain our fee renewal rate consistently above 90%, even with this headwind. Shifting to our Services revenue by business unit for the quarter, CPP represented 46% of Services revenue, QSP was 30%, PBPK was 19%, and Reg was 5%.
For the trailing 12 months, CPP represented 45% of Services revenue, QSP was 28%, PBPK was 22%, and Reg was 5%. Total Services projects worked on during the quarter was 179, same as last year, and quarter-end backlog increased to $18.9 million compared to $15.8 million at the end of the first quarter last year. Anticipated revenue from backlog within 12 months increased to slightly over 80%. As we previously discussed, the addition of Immunetrics has led to a healthy pipeline of activity, including new accounts sourced from our client base, helping to increase our overall Services backlog. Turning to our consolidated income statement for the quarter, total R&D costs remained relatively consistent at $2.1 million, with R&D expenses flat at $1.2 million and capitalized R&D at $0.9 million.
With our recently announced transition to business units to improve our focus on customers, we also took the opportunity to evaluate our departmental structure with a focus on continuing to improve operational performance and profitability while providing our investors improved visibility to our progress. In performing this process, we looked at personnel in the following departments: services, R&D, sales and marketing, and G&A. This was done during Q1 to support the recently announced leadership changes and consolidation of company-wide operations. To better measure and report our operational performance, we made the following changes. We moved all services personnel into cost of revenues departments. We moved all R&D personnel into research and development expense departments.
We moved all sales and marketing personnel into selling and marketing expense departments. And we moved all G&A personnel and all company-wide overhead and administrative costs into general and administrative expense departments. This still allows us to leverage the broad skill sets of our employees to perform activities in other departments and accordingly move their expense to those departments. For example, a services employee who spends time working on sales and marketing activities would have their expense related to this activity reflected in selling and marketing expense in our financial statements. If the same person also spends time working on R&D activities, their expense related to this would be reflected in research and development expense in our financial statements.
These movements completed the final step towards standardizing reporting for the various acquired companies, including Immunetrics last quarter, to a company-wide business unit structure reporting. We believe investors will now have even greater insight to our cost structure and can compare future performance trends when they review our financial statements. We will continue our objective to reduce G&A expense as a percentage of revenue over time while maintaining our investments in R&D and sales and marketing. And as we've always done, we plan to continue driving increases in both our Software and Services gross margins. Selling and marketing expense for the quarter was $2 million, up from $1.5 million last year. G&A expense for the quarter decreased to $5.7 million from $5.8 million last year.
Combined selling and marketing and G&A expenses accounted for 53% of total revenue compared to 60% of total revenue last year. This comparison reflects the shift this quarter for expenses that were previously bundled together in SG&A and are now separately reflected in cost of revenues for services personnel. Expenses generally grow each quarter with additional headcount added throughout the fiscal year. Income from operations remained consistent at 7% of revenue, and income before income taxes increased to 17% of revenue. Other income was $1.4 million this quarter versus $0.7 million last year, primarily due to increased interest income of $0.5 million driven by rising interest rates. Net income for the quarter was $1.9 million, or 13% of revenue, up from $1.2 million, or 10% of revenue.
Diluted earnings per share increased to $0.10 from $0.06 last year. Adjusted EBITDA increased to $3.4 million, or 23% of revenue, compared to $3 million or 25% adjusted EBITDA margin last year. We calculate adjusted EBITDA by adding back interest, taxes, depreciation, and amortization, stock-based compensation, gain or loss on currency exchange, any acquisition or financial transaction-related expenses, any asset impairment charges, and any tax provisions or benefits related to these items. We provide a reconciliation of this non-GAAP metric to net income, the relevant GAAP metric, in our earnings release and on our website. Income tax expense for the quarter was $0.5 million, up slightly compared to last year, and our effective tax rate decreased to 19% from 23% last year.
Now, turning to our balance sheet. We ended the quarter with $113.9 million in cash and short-term investments, and we continue to be well capitalized, have strong free cash flow, and seek opportunities for strategic acquisitions, investments, and partnerships. I'll now turn the call back to Shawn.
Shawn O'Connor: Thank you, Will. Our first quarter results provided a successful start to the year. We saw good performance from both our Software and Services segments. That said, the underlying assumptions regarding our outlook remain the same as client funding and budget cycles remain softer than historical levels. Following our fiscal 2023 revenue growth of 11%, we set fiscal 2024 revenue guidance with a range of 10% to 15%. Given our first quarter results, we're cautiously optimistic that the market for model-informed drug development could improve and return towards mid-teens growth, but it's too early to change our outlook. With that context, we are well positioned to meet our stated fiscal 2024 guidance targets, which include: total revenue between $66 million and $69 million, year-over-year revenue growth in the range of 10% to 15%, Software mix between 55% and 60%, Services mix 40% to 45%, and diluted earnings per share of $0.66 to $0.68.
The atmosphere of collaboration is strong here at Simulations Plus, as is the drive to innovate and serve our clients to help develop safer and more effective drug solutions. We have a long history of innovation in biosimulation that is transforming drug development in R&D and a rich future for growth opportunities. We continue to grow revenues, deliver profitable growth, and generate cash. Thank you for your time today. And with that, I'll now turn the call over to the operator for your questions.
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