Simulations Plus - Earnings Call - Q3 2020

Transcript

Speaker 0

afternoon, everyone. On behalf of Simulations Plus, I welcome you to our third quarter fiscal year twenty twenty 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 your control panel or you may use the handwriting icon on your control panel to ask your questions directly.

Please be sure to enter your 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 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 to turn the call over to CEO, Sean O'Connor. Sean?

Speaker 1

Thank you, Cameron. This was an excellent quarter for Simulations Plus despite challenging economic conditions resulting from the COVID-nineteen pandemic. Fortunately, the pandemic's impact to our company has been relatively minimal. And in the 2020, we delivered another strong quarter of results. We have stated goal of delivering organic revenue growth of 15% to 20% and we exceeded that goal with 24% revenue growth in total, 18% organic revenue growth.

This was our fourth consecutive quarter with total revenue growth in excess of 20%. Our software revenues represented 56% of our total revenue and grew 18% to $6,800,000 while our service revenue represented 44% of total revenue and grew 32% year over year to 5,500,000.0 Notably, each of our operating divisions delivered double digit revenue growth ranging from 12% to 39%. Our gross margin improved to 78% overall. Software gross margin was 90% in this seasonally high revenue growth quarter. Service gross margin rose to 63% in the quarter, driven by excellent performance by our Cognigyne division.

Excluding the effect of one time transaction expenses of $1,100,000 from our acquisition of Wixoft, our profitability metrics in the third quarter all showed improvement. SG and A expense was 32%, in line with our expectations of 35% for the year. Net income before taxes as a percentage of revenue was 40%. Earnings per share, excluding the impact of acquisition expenses, was $0.2 up 25% over last year. And finally, EBITDA as a percentage of revenue was 46%, again excluding the one time acquisition expenses.

This was an excellent quarter for the company. Thankfully, the impact of the COVID pandemic on us here at Simulations Plus has been relatively minimal. From an operations perspective, we successfully transitioned our workforce to a remote model for most of the quarter, with a small group beginning to return to work on a voluntary basis in June. Fortunately, prior to the start of our stay at home orders, we already had approximately 40% of our workforce working remotely and nearly everyone was equipped with the tools to make the transition from office to home rather seamlessly. As a result, there was minimal internal disruption to our business and productivity remains high.

I anticipate the remote workforce percentage will remain high on an ongoing basis into the future. Our workforce is highly engaged in the support of our clients and the pursuit of new business. We are advantaged with a portfolio of business that is largely insulated from the market cycles and shocks such as the COVID pandemic. A high percentage of our revenues, approximately 85% of our software revenue and 47% of total company revenue this quarter was derived from software renewals, which have experienced no impact to date. Our service business operates off a large backlog, which we continually review and validate.

Our backlog at the end of the third fiscal quarter was more than $12,000,000 representing more than three quarters worth of average service revenue into the future. At this point in time, we anticipate any impact to our backlog from the COVID virus will be less than 10%. Just as important, our strong balance sheet and cash position are more than adequate to support the final the ongoing operations of our business, initiatives for growth and track record of consistent quarterly dividends. We ended the quarter with more than $7,000,000 in cash and added an additional $3,500,000 credit facility as a backstop. Credit facility remains undrawn.

That is not to say that we have not seen some impact during these difficult times. As previously communicated, securing new business has been impacted as the pandemic has disrupted our clients' decision making and spending activities. For most of the third quarter, we experienced slowdown in new business closures, both in terms of new software licenses, especially in Asia and new service business. However, lead generation, virtual meetings and presentations are continuing in both our software and services businesses. With the cancellation of most industry conferences, we have been able to conduct trainings and workshops virtually and have successfully transitioned sales activities from face to face to virtual meetings.

As a result, our pipeline of vetted new business opportunities is growing And exiting the fiscal third quarter at the May, we began to see an increase in new business closures for new software license agreements and consulting contracts. It's too early to assess whether the trend has changed, but I am cautiously optimistic at this time. Finally, in addition to having monoliths from Glicksoft in our sales offerings, we have introduced two new service offerings that have initiated bookings in the last quarter. The two new service offerings are Strategies Plus, which provides regulatory guidance to our clients and our COVID program, which feeds consulting assistance to any organization involved in coronavirus research. Both are generating new opportunities and bookings.

Let me now turn to a brief comment or two specific to each division. At our Lancaster division, revenue was up 12% to $6,700,000 for the quarter. Breaking this down, 79 percent of Lancaster revenue was derived from renewals, 10% from new sales and 11% from consulting services. In our software business, renewal rates remained high at 88% on an account basis and 94% on a fee basis. New licensing units grew by 10 year over year.

Our new regulatory services offering generated approximately $250,000 in bookings during the third quarter. And we added 11 new commercial companies, including new licenses in The U. S, Europe, Japan and Brazil, while also expanding our presence with nonprofits, research groups, academic institutions and regulatory agencies. We're engaged in Lancaster in projects with 28 companies and seven funded collaborations. We ended the quarter with 45 full time employees at our Lancaster division, up one from 44 in the prior quarter and up four from 41 last year.

At our Buffalo division, revenue was up 20% to $3,000,000 for the quarter. Just as important, we made significant improvement in our gross margin, which increased to 56% of revenue, up from 52% in the year ago quarter as the division focused on internal project process efficiencies. We signed 33 contracts and initiated 18 new projects during the quarter. Overall, we have 64 active projects across 31 companies and 28 proposals outstanding with 24 different companies as of July 1. We ended the third quarter with 45 full time employees at our Buffalo division, down seven from 52 in the prior quarter and level with 45% last year.

These comparisons are impacted by a reduction implemented in software development staff no longer required to support project work efforts. The underlying growth of consulting staff is 41% year over year. Our DELI revenues increased 39% for the quarter to $1,900,000 Breaking this down, revenue related to DELI SIM software and service projects represented approximately 55% of the total. Radissim model services represented 5%. IPF model services represented 22% and Renasim grant service revenues represented 10%.

Finally, heart failure model contributed revenues totaling about 8%. Diliusem has 13 active consulting projects and seven active consortium contracts at this time. We ended the quarter with 21 full time employees at our RTP division, up three from 18 in the prior quarter and up four from 17 last year. During the quarter, we completed our acquisition of Licksoft, the developer of the highly regarded Monolix suite, a modeling platform that covers a wide range of data types and statistical features for population, PKPD modeling that is widely used by academia, pharma and regulatory agencies. This acquisition immediately expanded our presence in Europe and rebalanced our mix of software and consulting revenues with a shift weighted more towards software licensing.

Lixoft contributed two months of performance to our results in the third quarter, totaling about $600,000 of revenue, which represents a 15% growth over their revenues in the same period last year, while independent operating independently. The customer count is 52, a 23% increase over last year and their software renewal rates are 84% on fees and 98% on accounts. Post acquisition integration efforts are going well. These efforts are focused in four primary areas: first, the integration of Monolix into existing direct and distributor sales processes second, the evaluation of integrated software product development plans and third, the initiation of monolith based consulting service offerings and the training of our consulting staffs on the platform. Finally, the integration of the Lixoft organization into the company's business processes and infrastructure where appropriate.

Pleased to report that while just at their beginnings, progress is being made across all these objectives. I'll now turn the call over to John to review the detailed financial results. John?

Speaker 2

Thank you, Sean, and good afternoon, everyone. As Sean indicated, this was an excellent quarter for Simulations Plus. Our consolidated net revenues for the third quarter of our fiscal 2020 were up 23.8 or $2,400,000 to $12,300,000 from just under $10,000,000 the prior year. The third quarter represents the fourth consecutive quarter of revenue growth greater than 20%. On an organic basis, which excludes the Lixoft acquisition, our revenue grew 18.

Organic revenue remains steady in the high teens despite current economic conditions triggered by COVID-nineteen. The general sectors we operate in, software and life science pharmaceutical, have tended to maintain momentum in the midst of the pandemic. Consolidated software and software related sales increased $1,030,000 or 17.7% over the prior year quarter. Lipsoft software sales accounted for $566,000 or 55% of this increase. Consolidated and analytical study revenues increased $1,330,000 or 32.4% over the 2019.

Cost of revenues increased 14.7% or $341,000 resulting from increases in labor related costs and direct expenses on contracts. We saw a decrease in travel and travel related expenses of $154,000 as training was done online due to travel restrictions. In addition, this quarter, we recorded a benefit for royalties of $189,000 as the royalty agreement reached the final determination and amounts we had accrued were recognized back into income. Total gross profit increased 26.5% to $9,600,000 representing a 78.3% gross margin in the third quarter of the fiscal year. Historically, our highest quarter seasonally compared to a 76.6% gross margin in the same quarter last year.

Overall software margins were 90% and consulting margins were 63%. SG expenses, including the onetime M and A charges associated with the Wixoft acquisition of $1,100,000 in the quarter were $5,000,000 or 41% of revenue for the third quarter of the year, an increase of approximately $1,900,000 or 62% compared to the prior year. The increase in SG and A expenses was primarily a result of increase in selling expenses and commissions, increases in salaries and wages and labor related benefits as well as contract labor for outsourced services in support of company growth. Dollars 195,000 of the increase came from our new subsidiary during the two months since acquisition. And as I indicated earlier, we incurred approximately $1,100,000 of acquisition related costs in the quarter for legal, accounting, due diligence and M and A banker related fees.

Without M and A transaction related costs, SSG and A would have been approximately 32% of revenue. And we don't expect any substantive additional M and A transaction related expenses in the fiscal fourth quarter, nor do we foresee any material amounts of integration costs at this time. Research and development expenses for the third quarter were approximately $1,360,000 Of this total, dollars 753,000 was expensed and $606,000 was capitalized. This compares to approximately $1.07 the prior year in spend, And where, at that point, dollars 6 and 43,000 was expensed and $422,000 was capitalized. Income from operations was $3,900,000 for both the third quarter of fiscal year twenty twenty and twenty nineteen.

It remained flat year over year on higher revenue, primarily affected by the onetime M and A related expense of our acquisition of Lixoft. Our provision for income taxes in the third quarter of the year was $844,000 with an effective tax rate of 22.3% compared to an effective rate of 25% in the prior year. The rate is lower this period mainly due to the effect of stock compensation related deductions. We expect our tax rate to end up in the 22% to 25% range for this fiscal year. Net income increased 1.6% or approximately $47,000 to $2,900,000 in the third quarter of this year compared to $2,900,000 in the prior year.

On a per share basis, net income was $0.16 per diluted share in both fiscal year and last year. The Lixoft related transaction lowered diluted earnings per share by approximately $04 per share. EBITDA was $4,600,000 in the third quarter of both the fiscal year and last year. Now turning to the next slide is the nine month year to date comparisons. Consolidated net revenues year to date were up 23.5% or $6,100,000 to $32,000,000 compared to twenty five point nine million dollars a year ago.

Our gross margin for the first nine months of fiscal twenty twenty was 75.1% compared to 74% in the year ago quarter the year ago period, an improvement of 110 basis points. SG and A expenses, including $1,400,000 of onetime M and A transaction related costs were $12,600,000 or 39.4% of revenue for the first nine months of fiscal year twenty twenty compared to $8,600,000 or 33.2 percent of revenues for the same period last year. Research and development expenses were $3,800,000 for the first nine months, up about $500,000 from 3,300,000.0 the prior year. The expense portion increased $130,000 to $2,030,000 Year to date R and D expense is at 6.3% of revenue, down from 7.3% in the prior year. Income from operations for the first nine months of fiscal twenty twenty was $9,400,000 compared to $8,700,000 The net income increased by approximately $620,000 or 9.5% to 7,100,000.0 Diluted earnings per share was $0.39 per share compared to $0.36 for the same period last year.

The software related the Licksoft related transactions lowered EPS by approximately $06 per share year to date. EBITDA was $11,500,000 year to date, up 7% from the prior year. Turning to some graphs. This graph shows consolidated quarterly revenues. The third quarter of each fiscal year is typically our strongest, followed by a decrease in revenue in the fourth quarter that coincides with the slowdown in our clients purchasing in the summer months.

Once again, the 2020 followed the same upward trend. The next slide represents operating income by quarter, illustrating a consistent track record of increases both year over year and sequentially through the first and third quarters with the fourth quarter lighter for the year. As you can see, the patterns for quarterly revenues and quarterly income from operations have largely held true for quite a number of years. This quarter, we were flat compared to last year, again, the result of $1,100,000 of nonrecurring and nonoperational costs related to the Lixoft acquisition. The next slide of consolidated net income by quarter, we can see that similar pattern in net income in the third quarter typically being the strongest.

The graph isolates the impact of a $1,500,000 deferred tax benefit in the second quarter of fiscal year 'eighteen since it tends to skew the presentation without highlighting that difference. And again, this quarter, we were flat compared to last year as a result for the cost of the Lixoft acquisition. On the next slide, diluted earnings per share follow the same pattern and tracks with net income as expected. As I mentioned earlier, fiscal year twenty twenty third quarter diluted earnings per share were $0.16 and included M and A transaction costs for Lixoft. Excluding those nonrecurring expenses, earnings per share would have been approximately $04 more.

Turning to EBITDA on the next slide. Again, the patterns hold for EBITDA with the overall trends moving upward and to the right and typical seasonality exists between the quarters. Let me mention one thing about the trends in our fiscal performance. So many, we are unable to truly predict all the possible future impact of COVID-nineteen with any degree of certainty. However, based on our current visibility, we expect the seasonal nature of our revenue, income and EPS to continue in the coming quarters based on our annual software revenue renewal model, consulting backlog and our pipeline of new business opportunities.

This slide shows our revenue by region on a year to date basis. We sell globally with the majority of our revenue in the Western Hemisphere. Approximately 69% of revenues were in The Americas year to date this year, while Europe representing 16% and Asia 15%, half of which sales were derived from sales in Japan. On the next slide, it illustrates our strength of our cash position with a quarterly view of our cash balance and how we've used funds for investing through acquisitions and returns to shareholders in the form of cash dividends. The red line indicates lower points of cash at times when we have invested in acquisitions.

The green bar represents cash used for acquisitions with $6,000,000 net cash paid in the most recent quarter of our for our acquisition of Lixoft. Cash flows from operations have allowed us to invest for future growth through acquisitions while maintaining a healthy balance sheet. After each acquisition, you can see a pattern of cash accumulation. Beginning with the first quarter of 'seventeen on the far left, the blue bar at the bottom illustrates a consistent dividend payout with approximately $900,000 per fiscal year through fiscal year 'seventeen. And then at the beginning of 'eighteen, the Board increased the dividend payment to $06 a share, thereby returning $1,000,000 to $1.1 in cash to our shareholders quarterly through the present quarter.

Today in our press release, we again announced that the Board of Directors has voted to continue the $06 quarterly dividend. The next dividend payment will be August 3. Our reinvestment through acquisitions has exceeded $16,000,000 over the last four to five fiscal years, while we have also returned more than $15,000,000 to our shareholders through consistent dividend payouts without the use of any borrowed debt. During the third quarter, as Sean mentioned before, we established a $3,500,000 line of credit with the commercial bank. Under the terms of the LLC, drawn amounts in current interest at prime rate were at a fixed rate based on LIBOR plus 175 basis points.

It's a two year agreement, and there are no charges for undrawn line amounts. At the end of our third quarter, we had nothing drawn under the facility and do not anticipate a need to access the line in the near future. However, it does provide us with access to liquidity should the need arise. Turning to the next slide, few of the balance sheet metrics. At the end of the quarter, cash was at $7,400,000 which was down 35% compared to the last fiscal year, primarily the result of cash used in the acquisition of Litsoft.

FERT ratios and liability changes are mainly the result of any acquisition liabilities booked. Our balance sheet remains strong with excess cash and zero borrowed debt. With our continued cash flow generation and a prudent approach to allocating capital, we are well positioned to support our continued growth and protect our business during economic cycles. Sean, I'll turn the call back to you now.

Speaker 1

Thank you, John. Additionally, today, we filed an audit a shelf registration on Form S-three with the SEC. The registration statement and prospectus allow the company to register various securities, including common or preferred stock as well as warrants and or depository shares. We have not filed a specific prospectus supplement to initiate an offering at this time, but it put the shelf registration in place for use in the future and in support of working capital, m and a, and other general corporate purposes. Our recent qualification under the well known seasoned issuer rules made this undertaking timely and efficient.

In conclusion, we are well positioned to continue our record of strong financial performance and encouraged by the prospects for our business despite the lingering unknowns related to the COVID pandemic. We are out of the gate strong with the integration of Lixoft and encouraged by opportunities that business that business opens up for us, particularly in Europe. Demand for our solutions remains strong, although we may experience delays in the timing of customer orders. We're confident any short term disruptions in the flow of new license orders will not impact the long term prospects for our business or the thesis for investing in Simulations Plus. We expect double digit year over year revenue growth in the fiscal fourth quarter despite the impact of seasonality on a sequential basis.

With that, I'd like to turn the call back to the operator, Cameron, and take any questions that you might have.

Speaker 0

Thank you, Sean. Please hold one second while we poll for the live questions. And our first question comes from Matt Hewitt, the analyst with Craig Hallum.

Speaker 3

Thank you for taking the questions and congratulations on the strong third quarter.

Speaker 1

Thanks, How are doing?

Speaker 3

We're hanging in there. I guess, first off, could you maybe talk a little bit and you touched on this, but I'm wondering if you could talk a little bit about the cadence. We know that there was a little bit of slowdown on new customer bookings in the quarter. But how has that cadence changed, I guess, as the quarter progressed? And where do things kind of sit now?

Are you seeing a stronger uptrend there? Or is it still some hesitancy?

Speaker 1

Well, yes, I'd describe it this way, Matt. We went into the quarter with a reduction reducing our expectation in terms of the new licenses, new consulting contracts. We saw that in the last month of our second quarter and went into the third quarter anticipating a relatively slow pace. That slow pace came into reality and during the year our closure of new business was well below what historically we've seen. We did see as we entered the last month of our quarter, May, that things picked up a little bit and look at that very optimistically.

But I just don't know that it's something a trend change that we can hang our hat on just yet. And so we're cautiously looking into the fourth quarter that we will remain impacted by COVID slowdown. As we look at our customers across the board, kind of like the pandemic response in general, I think people started to come back and activity started to pick up and maybe has taken a little step back as infection rates, etcetera, have stepped up. And so I wanna be optimistic. We certainly did better than we anticipated on reduced expectations in May, the last month of the third quarter.

And I'd like to say that that's a positive uptick, a positive trend forward, but I don't think it's a big enough data point for us yet to say that things have turned in the marketplace for us. We'll remain cautious as we go into the fourth quarter.

Speaker 3

Understood. Okay. And then I guess kind of moving down the income statement. Gross margin, that was your high watermark going back to all the way to 2017. How sustainable and I appreciate some of the seasonality, but how sustainable is this gross margin given some of the changes working from home and kind of the mix adding Licksoft with the higher software margin, but how should we be thinking about gross margin?

Speaker 1

Yes, I don't see that anything too significant has happened in there other than a recent improved margins out of our Cognigyne consulting operations where we found some efficiencies and started to implement them and they had a very good quarter. Again, third quarter is our highest revenue quarter from a seasonality perspective. And so we benefit as we add expenses on more or less a linear basis through the year. Our peak revenue is arrives here in the third quarter. And then as the seasonality dictates, we'll step down in the fourth quarter.

And you'll see the pattern on an annual basis is pretty consistent that, that gross margin will be impacted in the fourth quarter. So I point you to the year over year gross revenue results, which are a little bit improved over last year as well. So we're seeing some improvements there. Obviously, LickUp coming into the mix adds more software, high gross margin software to our mix, takes our overall revenue back to more of a closer to 50 fiveforty five split between the two sources of revenue, and that certainly helps gross margin as well. So a little bit improvement on the uptick, but as you model and look forward, keep in mind that there's a seasonality factor in later.

Speaker 3

Got it. All right. Maybe one more and then I'll hop back into queue. Given the strong performance that you've been putting up and the balance sheet, your profitability, is there have you had any discussions internally with the Board regarding maybe taking on a little bit of risk with some of your customers? And what I'm, I guess, asking is, is there any chance that you could start to look at some of your customers and say, instead of charging you X, we would be interested in essentially partnering with you where we're going to collect milestones and royalties as your pipeline opportunities are successful.

Has that discussion come up? And what are your thoughts on that type of a model?

Speaker 1

It's a big change in terms of our model today being a traditional mix of software and and consulting revenues, we've always focused on returning very good profitability metrics on a quarterly basis, a change to a royalty milestone, betting on the the the future, would would impact that tremendously. So that would be a significant change in in our approach. We certainly do look at situations where can we package our services in different forms of service offerings that, you know, may lead us into areas where we're looking at delivering consulting results that for the clients, it helps them today. It doesn't pay off for them to until longer road longer turns down the road, which might prompt royalties into the discussion. We're we're we're not close to making any of those sort of changes in in our business model at this point in time and feel comfortable that we're able to deliver a good value to our clients at a good return to us and the shareholders in our current model today.

Speaker 3

Fair enough. All right. Thank you.

Speaker 0

Thank you, Matt. And our next question is from Kevin Gaid of Bail Gainor. Kevin, your line is now live.

Speaker 4

Hi, good afternoon and congratulations on a strong quarter. I just wanted to bring up the shelf registration. It seems like some of the commentary it discussed, the timeliness of being able to become a serial issuer. Is this timely in the sense that you are looking to engage more in M and A? And if you do so, are you looking to use anything other than accumulated cash on your balance sheet?

Thank you very much.

Speaker 1

Sure. Sure. Yes. No, it's something the shelf registration is something that we've looked at for some time and considered to be appropriate for a company and our size, shape and whatnot. Achieving the WICCI threshold a month ago put us in a position where the ease of filing that registration statement was facilitated immensely in the review period, being a big piece of it and other benefits as well.

In terms of its potential use out into the future, it doesn't change our approach in terms of modeling, merger and acquisition activity. It's an ongoing effort on our part. We closed Lixoft a couple of months ago. The third acquisition the company has made. And as I've said before, you know, we've done it on kind of an every three year basis, and I hope that that window is shortened.

We're able to move, identify, and take action on appropriate target candidates on a quicker pace here. The shelf there being there will allow us some ease and speed in terms of responding depending on the nature of those transactions and the need for shares and or cash to to move on those. We've made a good cash position already, and as we've done the other acquisitions, funded them out of existing resources, existing capital. If anything, this might give us an opportunity to look at target opportunities that are a little bit larger down the road. Hope that answers your question.

Speaker 4

Yes, that's very helpful. And maybe if you can discuss briefly the valuation of some of the targets that you've been looking at. Is the opportunity set within your expected range perhaps some intriguing? And then lastly, you had brought you had put out a PR about partnering with COVID research organizations. Has there been any product wins related to COVID-nineteen, either antivirals or vaccines from Simulation Plus?

Speaker 1

In terms of the M and A target list, I mean, the values run from small to large, large to find historically as to what we lack an appetite to invite off the three previous transactions. You know, we're all in sort of $20,000,000 and below size. As I said, the target list, if you will, make it expand in terms of its valuation size as we as we go forward. With regard to the COVID efforts out there, yeah, it's been a fast and furious market. We tried to be a good citizen and and in many ways, some of our our knowledge or past experience and and and model efforts to date, on an on a Gradus basis in some scenarios, counting on the fact that they would translate to commercial opportunities, going forward.

We've got some small realities in that regard, and we've got a pipeline of discussions and grant proposals and number number of opportunities in in process and in the pipeline going forward.

Speaker 4

Great. Thank you so much.

Speaker 0

Thank you. The first question is from Howard Halperin with Taglich Brothers. His first question is, what will drive improvements in potential gross and operating margins over the next twelve months?

Speaker 1

Well, obviously, the two biggest impacts on those percentage results, operating expenses and gross margin are: a, our overall revenue growth. As we get larger, there are certain fixed expenses that don't rise with revenue growth, and we'll see a little bit of improvement there. The other big impact is the mix of our software and consulting revenues. Consulting opportunities, consulting revenue continues to grow at 30% plus ranges and the software in the 15% level. And so we have a continual mix change that takes place.

We look to keep that in the favor of software through internal development of products and driving existing portfolio of software products revenue growth at a faster pace. And then obviously, as with Lidsoft, add to the software side of our business through acquisitions going forward.

Speaker 0

Thank you, Sean. Next question from Howard is, over the next twelve months, what are the gross prospects for the European subsidiary?

Speaker 1

Lisoft has very consistently grown the last couple, three years at 30% top line growth rate. They've enjoyed a little bit the role of small numbers there as they've climbed their way to a 3,000,000 to $4,000,000 annual level of revenue. We are pleased with their results in the first couple of months here. We only get a partial quarter. And as they've come on board, they are seeing the same impacts that our existing software business has encountered as a result of the COVID situation.

So, you know, their growth rate out to shoot here as part of the Simulations Plus family, I would anticipate that may come down from that 30% growth level that they've enjoyed for the last few years. But in the long run, they certainly will grow in the 15% to 20% range that we've been touting here in terms of our ability to grow on an organic basis. They should fit well into that and might be able to contribute to at the high or above side of that depending on how quickly and when and and how we come out of the COVID COVID scenario. Their revenues are a 100% software upon acquisition, 99%, I guess. There there are, you know, some small contribution on on the service side, And but that's an upside.

And so in terms of looking at at at at Europe and really globally, our ability to take advantage of consulting business that is drawn to or tied to the funnel exceed application presents an opportunity for contribution of revenues going forward as well. So an exciting exciting addition to the mix here and gotten off to a very good start in the first couple three months since I joined the team and look forward to seeing what we can do with it going forward.

Speaker 0

Thank you, Sean. The next question from Howard is on top of the $5,000,000 five year Kiwi contract, has Kiwi in the offering made any inroads as the need for security is increasing during the drug development process?

Speaker 1

You know, I'd say it's late. You know, certainly making big investments in the Keely like data repository decisions impacted probably more significantly than analytical tools like GastroPlus Monolix. Those are the types of decisions that have been shelved in terms of our our our clients out there in the in in the marketplace. So, I think my response there is no, not seen any uptick in that area of our business as well.

Speaker 0

Great. Thank you. The final question from Howard or Halperin is for modeling purposes, what is the likely quarterly increase in D and A expense related to the Lixoft acquisition?

Speaker 1

G and A expense, I presume, is maybe a typo's SG and A expense.

Speaker 0

Just depreciation and raise. Yes.

Speaker 1

The SG and A level certainly will respond. Their model fits in right with ours. And so our expectation that we're kind of operating on an annualized 35% SG and A level looks up to fit right into that relatively small operation in its consolidation into our numbers, no dramatic change. Their overall margins are even better than our pre consolidation EBITDA percentages at SunPlus. So they will contribute disproportionately in terms of increasing cash flow and EBITDA.

Thank

Speaker 0

you, Sean. And we have a few written questions from Brett Gisacchio, but he is on the line live. So we'll let them ask those questions live first and then follow-up with any of the written questions that he submitted. Brett?

Speaker 3

Hello.

Speaker 0

Right? Can you hear me?

Speaker 1

Yeah. Go ahead, Brett.

Speaker 0

Yes. We're live.

Speaker 5

Yeah. So, thank you for taking my question. The first question is, what is your current marketing slash sales approach to distribution your software to other pharma companies, chemical companies, etcetera? And do you have any plans to expand your proprietary software to the enterprise resource planning space outside of pharma, biochemicals or more so manufacturing other markets? And then the second question is Japan seems like a huge opportunity for you that is primed for penetration growth.

What is your sales and marketing approach there to grow revenue?

Speaker 1

Sure, Brett. I'll walk through them. Our current sales process is both direct and through distributors. The distributor network is utilized in the Asian markets and the rest of the world is direct sales effort on our part. Turning to I guess the second part of that first question is in terms of expansion outside of the pharma space, not as far reaching as generic ERP spaces manufacturing.

We do impact can impact certain pharmaceutical manufacturing decisions and activities. But if the question is from an ANSYS sort of perspective of applying our modeling and service to a wider range of industries, the answer is no. We'll stay focused in our pharmaceutical space and the adjacencies to it. The Japanese market is, yes, one of the larger non North American markets, Europe and Asia being the the the two two big markets for us outside of North America. Japan, as I said, we we use distributors there for our software products.

And on a consulting side, we do some business in in Japan. We do, you know, a fair percentage of business for Japan through their Japanese representation companies here in North America, their subsidiaries in in North America. The opportunity exists at some point in the future. I've other consulting organizations with our health see some of the success when they have consultants on the ground in Japan would contribute, I think, to a greater capture of market share in that regard, and that's something that we certainly look at in the future, but haven't pulled the trigger on doing something of that nature at this time just yet. Hopefully, that touches on your questions.

Speaker 0

Thank you, Sean. And then we have one follow-up question from Kevin Gate. I'll unmute his line now. Ken, you're now live.

Speaker 4

Hi. Thanks again for taking my follow-up. My question is just generally, you if can kind of speak to the resilience of the software and modeling industry within the pharma space and maybe talk about the long term growth aspect. Just seems like this where you are in the drug creation space is almost perpetually growing. So just perhaps talk to any puts and takes to what you all have seen over the past several months as it looks to the future?

Thank you.

Speaker 2

Sure. Sure.

Speaker 1

Yes, it's an exciting market for me from my perspective of having been involved for twenty years now. Those early days of banging our head on cement wall at a large pharma company and trying to get that initial adoption initiated, we've come a long way from that point in time. And today, it's certainly accepted and adopted and flourishing in terms of its expanded application, both along the timeline of delivery to approval as well as the various means through the between those two points in terms of impacting decisions, prioritizing molecules, affecting bioequivalence decisions, impacting FDA response to submissions, the list goes on. And, you know, we've been gated over time as well by the available resources that are out there, the number of scientists that have this relatively unique mix of math, statistics, biology, chemistry, etcetera, that are able to drive the drive the software, if you will. We today have numerous academic organizations producing candidates that are populating the the field and allowing more resources in that regard that is supporting the growth and adoption and modeling and simulation in the pharma space.

I look at, you know, one of the silver linings of the COVID in pandemic here, If we can search for those things, is the heightened awareness of Geotis takes too damn long to develop the drug, and it seems to be such a painful process. How can we improve it? And that's what modeling and simulation delivers to the to the industry. So we're getting some attention. It's well deserved.

We can be very impactful in terms of the efficiency and effectiveness of the drug development cycle. And as I look out into the future, I don't see any end to this expansion of application and modeling and simulation in new and different ways that can impact our clients, and I'm very excited about the future for modeling and simulation.

Speaker 4

Great. Thank you.

Speaker 0

Well, thank you, Sean. And this concludes the conference call today. Thank you, everyone. If you've missed any part of today's conference call, the replay will be available on our website www.simulations+.com. Thank you, and look forward to the next earnings call to further our dialogue.

Thank you.

Speaker 1

Thanks, everyone.