Simulations Plus - Earnings Call - Q3 2019

Transcript

Speaker 0

Good afternoon, everyone. On behalf of Simulations Plus, I welcome you to our third quarter fiscal year twenty nineteen financial results conference call and webinar. Hosting the call today is Simulations Plus' CEO, Sean O'Connor and the company's CFO, John Kneisel. An opportunity to ask questions will follow today's presentation. You may send your written questions using the questions pane on the control panel or you may use the hand raising icon on your control panel to ask your question directly.

Please be sure to enter the unique audio pin displayed when you join the call. 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 and 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 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 are maintained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

With that said, I'd to turn the call over to Sean O'Connor. Sean?

Speaker 1

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 twenty eighteen Q3 growth of 11% adjusted for last year's acquisition source growth. Our software revenue growth achieved record levels in this, 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 Rinosem 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 three 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 three 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 three divisions. Internationally, we made progress as well.

While we did not add personnel in Europe during the quarter, we have hired two 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 DiliSim 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 $5,400,000 is a record for the company, and this our quarter with our highest level of renewal business.

Consulting revenue in this division grew 53% on its small base, reflecting the demand, however, for collaborative efforts for CastroPlus enhancements and PVPK modeling assistance. 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 of two eighty four were up 5% year over year.

We added seven new commercial companies and 11 nonprofit groups. We have projects with 28 companies and four funded collaborations. During the quarter, we strengthened our relationship with the regulatory agencies worldwide. The FDA purchased a 15 user license for our ADME 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. Achieved 31% revenue growth year over year and 20% growth year to date. This has been a year of strong growth for this division. This 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. DiliSim released NAFLDSim 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?

Speaker 2

All right. Thanks, John. Appreciate it. Look at our consolidating net revenues for our third quarter fiscal year twenty nineteen, they were up 16.2% or approximately $1,400,000 to $9,900,000 compared to 8.6% for the prior year. By division, Lancaster's revenues were up 6.6% or almost 7% to $6,000,000 Buffalo revenues were up 30.7% to $2,500,000 and RTP revenues were up 43.5 to $1,400,000 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 1,200,000.0 or 39%. The gross profit increased 16.6% to $7,600,000 representing a 76.6% gross margin in the 2019 compared to $6,500,000 or 76.3% gross margin in the same quarter 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 and A expenses were $3,100,000 in the quarter or 31.1% of revenue, an increase of about $500,000 or 18.6% compared to $2,600,000 or 30.4% of revenue in the 2018.

This increase in SG and A expense was primarily the result of wage and salary increases from stock compensation, recruiting and hiring fees were included in there We had an increase in full time CEO costs and the increase in headcount in Lancaster and Buffalo make up the majority of that time. Our research and development costs during the period, we incurred $1,100,000 of R and D costs. Of that amount, we expensed 6 and $43,000 which was 6.5% of revenue. Dollars 422,000 was capitalized. Overall, we increased our R and D spend by $73,000 over the prior year.

The expense portion of $643,000 increased by $135,000 or 26.6 percent compared to $5.00 8,000,000 or 5.9% of revenue in the 2018. Income from operations for the 2019 was $3,900,000 up 464,000 or 13.6 percent compared to 3,400,000.0 in the year ago quarter. This was primarily the result of revenue growth outpacing the increase in costs and with the slightly higher gross margins that we saw. Our provision for income tax in the quarter was £964,000 with an effective tax rate of 25% compared to £991,000 in the prior year quarter, an effective rate of 29.2%. That effective tax decrease is attributable to the new Tax Act, became effective in January 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 $2,900,000 for the most recent quarter compared to $2,400,000 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 $4,600,000 this quarter, up 13 compared to $4,000,000 a year ago. Turning to the nine month slides, we'll cover some top high level items here. Consolidated net revenues year to date for 2019 were up 12.9%, approximately $3,000,000 to $25,900,000 compared to $23,000,000 the prior year. By division, Lancaster revenues were up 8.1% to $15,400,000 Buffalo revenues were up $20.56900000.0 dollars and North Carolina RTP revenues were up 21,300,000.0 to $3,700,000 Our year to date consolidated software and software related revenues were up $1,100,000 or 7.8% and consulting service revenues were up 1,900,000.0 or 20.3%. Gross profit increased $2,100,000 or 12.3% with margins decreasing 0.4% to 74% from 74.4%.

SG and 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 and 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 and 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 are expecting 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.

One last comment on year to date information. Net income shows a decrease of $1,100,000 For those who have followed SLP, you'll recall that last year, we recorded a $1,500,000 tax benefit in the second quarter of fiscal 'eighteen due to the change in the tax rates and reassessing our deferred taxes. That benefit was a one time 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 $08 per share on last year's income. Next, turning to Slide 11 for a view of our quarter by revenue by quarter.

This slide shows our revenue on a quarterly basis from fiscal years twenty fifteen 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 clients purchasing project activities during the summer months. On the next slide, it's 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 shaded the effect of the $1,500,000 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 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 five years now. Beginning with the 2015 on the far left side, the blue bars at the bottom illustrate our consistent dividend payout. And then in 2018, our Board increased dividend payment to $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 $15,000,000 over the past four to five 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've increased the value of the company. As of yesterday, our cash balance was at $12,900,000 We do have a payout of about $1,700,000 to make the next two months for acquisition payment on RTP acquisition.

But again, today, we announced with our earnings release that the Board of Directors voted to distribute another $06 per share quarterly dividend payable August 1. Now I'll turn the call back to you, Sean.

Speaker 1

Thank you, John. In summary, quarter demonstrated the continued returns on our growth related investments. Revenue growth outpaced increased spending and we enjoyed strong gross and 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.

Speaker 0

Thank you, Sean. Once again, if you'd like to ask a question with your telephone, please use the hand raising icon on the control panel and be sure to enter a unique audio PIN. While we wait for any potential questions on the telephone, we'll first start with some of the online questions that have been posed. The first question comes from Howard Halpern. And his question is, you mentioned a large customer that will include software consulting services across your three divisions.

Do you have any additional proposals outstanding that will use all three resources, for your three divisions? And how does the new and renewed licenses with regulatory agencies globally play into your sales and marketing strategy?

Speaker 1

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 three divisions. This process is initiating. We've had some success to date. There's certainly 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 for. 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's 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, and 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's a tremendous validation and driving commercial customers from the visibility we get with our relationships on the regulatory side.

Speaker 0

Thank you. The next question also from Howard is, where does the Kiwi communications and collaboration platform stand in terms of customer acceptance and revenue growth potential?

Speaker 1

Yes. We had a release in the quarter as well 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, is still being accepted and evaluated in the industry as a whole or those that have adopted that sort of product, have typically built a a solution in house to meet, their particular needs, SOPs process that they have implemented in internally. And like in, you know, 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, you know, some acceptance on that client's part of accepting a standard process, that is embedded in a 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's value there, and this revenue opportunity sits out in front of us still at this point in time.

Speaker 0

Thank you, Sean. 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?

Speaker 1

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 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'll 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 reach into new clients that perhaps we've 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 contribute on both sides of our business.

Speaker 0

Thank you. And we have one final question from Howard Halpern, Research Analyst at Tadgets Brothers. Is your outlook for the recently released PK Plus version 2.5? And can it drive sales of your existing offerings?

Speaker 1

Yeah. We significant release of PK Plus just recently recently announced and is evidence of our our our continued process of listening to the marketplace and responding with enhanced feature 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 PP, PK and PKPD approaches.

And so given our strength on the PK 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 PeakSight Plus 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 is 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.

Speaker 0

Thank you. And we do have one audio question from Adam Keller. Please stand by while I unmute the line. Hey, this is Adam. Adam, you're live.

Speaker 2

So I was wondering, Solutions Plus has been growing top line revenue at 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?

Speaker 1

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 DiliSum, 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, first, the Simulations Plus alone and then with Cognigen and then the addition of DillySum, 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 meet what is a pretty aggressive adoption of modeling and simulation 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 part of our strategy.

And when they come into play, they will 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.

Speaker 2

And

Speaker 0

we do have one further written in question from Carl Hoffman. 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?

Speaker 1

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 quarterly assessment that is had by the board.

Speaker 0

Thank you. That completes the question and answer portion and also our conference call and webinar for today. If you've missed any part of today's presentation, the replay will be available at our website, www.simulation+.com. Thank you, and have a great day. Thanks, everyone.