Simulations Plus - Earnings Call - Q4 2019

Transcript

Speaker 0

Good afternoon, everyone. On behalf of Simulations Plus, I welcome you to our fourth quarter and full 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 in the control panel or you may use the hand raising icon in the 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 to remind everyone that 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 distinctly from those statements. Factors that can cause to 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 their 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 Sean O'Connor. Sean? 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 in 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% demonstrates 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 twenty nineteen, equivalent to our gross margin performance in fiscal year twenty eighteen, 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 has our DiliSim team working at full capacity to support this platform development as well as client driven consulting projects.

We've 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 four people will continue to be a source of growth for us. These investments have put pressure on our SG and A spending, which increased in the fourth quarter to 39% of revenue.

For the year, SG and 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 and 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'm 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 consultants.

Our renewal rates were 86% based on accounts and 94% based on fees. Our license units of two forty one were up 14% year over year. We added 20 new commercial companies and 13 nonprofit groups. We have projects from 27 companies and 500 collaborations. Our service business grew nicely in the quarter with a combination of consulting projects for customers and collaborations on feature development with the GastroPlus platform.

During the quarter, we announced two 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 strategy. Secondly, a funded collaboration agreement with a large pharmaceutical company to develop the virtual bioequivalence trial simulated 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 and Gas Group Plus to extend its functionality and market opportunities. We ended the quarter with 45 full time employees at our Lancaster division, down one 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 the Assist division, more than doubling last year's revenue growth rate of 8%. Demand remains high for this type of PKPD comp 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 Seedler Kelly, the President of this division. Ms.

Seedler Kelly was one of the founders of Cognigen along with Ted Dracella. Jill's knowledge and experience in the PKPD 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 Grisele 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 Parts division delivered 13% revenue growth for the quarter and 19% for the full year. The division is operating at 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 the QSC platform for acute radiation centers. This is a multiyear project that, like the division's other collaborations, is funded in its initial build and upon completion, we retain the platform IP for licensing consulting services with other clients. We ended the quarter with 17 full time employees at our RCT division, unchanged from the prior quarter and up one 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 impacts. Let me now turn the call over to John to review the detailed financial results. John?

Speaker 1

Thanks, Sean. 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 2019 were up 20%, as Sean indicated, or about $1,300,000 to $8,000,000 compared to 6,700,000.0 for the prior year. By division, Lancaster's revenues were up 27% to 4,200,000.0 Buffalo's revenues were up 14% to $2,400,000 and RTP revenues were up 13% to $1,400,000 over the same period last year. As Sean 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 on the software.

Sorry about that. The gross profit increased 25.5 increased 25.5% to 5,700,000.0, representing a 71.5 gross

Speaker 2

To control on hold beats, press 3. To hear this help message, press 4. To mute or unmute your line, press 6.

Speaker 1

Cost of sales increased by approximately a 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 2018. SG and A expenses were $3,200,000 or 39.6% of revenue in the 2019, an increase of approximately $950,000 or 42.7% compared to $2,200,000 or 33.4% of revenue in the 2018. The increase in SG and A expense was primarily the result of increases 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 $1,040,000 This was total of of this $603,000 or 7.5% of revenue was expensed and $437,000 was capitalized. Overall, we increased our R and D spend in the fourth quarter of 'nineteen by $348,000 compared to the prior year. The expense portion of 6 zero three increased by $287,000 or 64 or 42.6%, representing 7.5% of revenue compared to the 437,000 or six and a half percent of revenue in the fourth quarter of the prior year. Income from operations for the 2019 was $2,000,000 up $51,000 or 2,700,000.0 compared to $1,900,000 in the year ago quarter. Our provision for income taxes for the fourth quarter of fiscal year 'nineteen 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 effective stock compensation deductions from stock option exercises and sales by optionees. With the increase in our stock price over the last six 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 $1,600,000

Speaker 0

Net

Speaker 1

income increased by $721,000 or 53.9% to $2,100,000 for the most recent quarter compared to $1,300,000 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 'nineteen compared to $08 in the prior year period. EBITDA was $2,700,000 this quarter, up about 3% compared to $2,600,000 a year ago. Turning to the next slide for the full year's financial results. Net revenues for the full fiscal year of 'nineteen were up 14.5, an increase of 4,300,000.0 or 34 to 34,000,000 compared to 29,700,000.0 in fiscal twenty eighteen.

By division, Lancaster revenues were up 12% to $19,600,000 Buffalo revenues were up 18.6 to $9,300,000

Speaker 0

and

Speaker 1

North Carolina RTP revenues were up 19% to $5,100,000 Our full consolidated full year consolidated software related revenues were up $1,800,000 or 11% and consulting services revenues were up 2,400,000 or 19%. Gross profit for the fiscal year 2019 increased $3,300,000 or 15.1% to $24,900,000 up from 21,700,000.0 Gross profit margin also increased from 73.1% for fiscal year twenty eighteen to 73.4% for fiscal year twenty nineteen. SG and A expenses were $11,800,000 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 and A as a percentage of revenues for fiscal year twenty nineteen was $34,700,000 up from $32,300,000 for fiscal year twenty eighteen.

R and D expense was $2,500,000 or 7,400,000.0 of revenue for fiscal year twenty nineteen, in line with the 7% we expected and compared to $1,800,000 or 6% of revenue for fiscal year twenty eighteen. The tax provision for fiscal year twenty nineteen was $2,000,000 an effective rate of about 18.7% compared to a $1,200,000 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. We anticipate our effective rate will be in the 21 to 24% range for fiscal year twenty twenty, but may see fluctuations depending on option exercises and other factors. Also as a reminder, we recorded $1,500,000 onetime tax benefit in the second quarter of fiscal 'eighteen due to the change in the tax rates and the reassessment of our deferred taxes.

Lastly, our net income for fiscal year twenty nineteen was $8,600,000 or $0.48 per diluted share compared to $8,900,000 or $0.50 per diluted share in fiscal twenty eighteen. The year over year increase or decrease of net income and EPS is primarily in the tax line 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 'fifteen to 'nineteen, illustrating seasonality of the business. Our third quarter is typically the strongest quarter with the decrease in revenue in the fourth quarter that coincides with the slowdown of our clients purchasing during the summer months. Our fourth quarter 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 a 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 twenty nineteen. 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 $1,500,000 deferred tax benefit in the 2019, sort of the light purple sections 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 follow the same pattern and tracking with track with net income. Next slide covers EBITDA and as expected, the seasonal patterns hold true with upward and typically seasonality between the quarter. This slide illustrates our revenue by region. We're a global business and the majority of our revenues are in North America, approximately 64% for fiscal year twenty nineteen. 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 five years. Beginning with the first quarter of fiscal year 'fifteen on the far left side, the blue bars on the bottom illustrate our consistent dividend payout, approximately

Speaker 0

$800

Speaker 1

to $900 per fiscal quarter. Then in the beginning of twenty eighteen fiscal year twenty eighteen, our Board increased the dividend payment to $06 a share, returning approximately $1,000,000 to $1.1 of cash for our shareholders on a quarterly basis.

Speaker 2

The

Speaker 1

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 $15,000,000 over the last four to five 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, our cash balance was $11,400,000 which is up 22% compared to $9,400,000 in 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, Sean.

Speaker 0

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

Speaker 1

No. Not at not at all. So I I'll I'll just guys have seen this a little bit before this. Look at

Speaker 0

the cost of apologies. I'm back. I'm back. I leaned over and yanked my earphone plug out. I apologize 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 twenty twenty 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 the demand going into next year. With that, Cameron, let's turn it over to the questions.

Thank you. And once again, if you'd to ask a question using your telephone, please use the hand raising icon on the control panel, and be sure to enter your unique audio PIN. And while we wait for any additional live calls, we'll 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 market size, the two Gasser Plus collaborations announced in September and October 2019? Sure, Howard.

The two collaborations are just initiating and sort of the timing in terms of the opportunity, all in its first instance in terms of their funding, the R and D effort begins with the projects, The opportunity in terms of follow on market for those two endeavors is still out there into the future. The collaboration with the biotech company with the high 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 addition to sale of customer 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 Caster Plus at the cutting edge with a host of features and models and capabilities to continue to maintain its leadership position in the marketplace. And for the second, in terms of providing incremental module revenue opportunity for the project going forward, we're looking at adding significant market opportunity or acquisitions, but it certainly solidifies our position.

And the second one, the module one, probably adds to our market size down the road, but not something that we can quantify at this point in time. Thank you, Sean. The next question is, what is your hiring plan for fiscal year twenty twenty? How is the current market for hiring additional scientists and or marketing professionals? Yeah.

Last year, we you know, I think our our our overall headcount growth was about 18% at, you know, about the size of our our 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 it will track to or just below our revenue growth as we go into into the forward tiers. The marketplace for professionals on the scientific side and the consulting side remains very competitive. The skill sets that 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 developing practices.

And therefore, it remains a very competitive marketplace, and it could be very successful, in presenting, the benefits and value to scientists, and they're joining the team here at Cimulation 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 pay appraisers. It'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 research now. Thanks, John. 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? 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 simulation in new areas in direct development cycle, either early stage of discovery, clinical trial, portion of the development cycle, or down the road in terms of applications that may reach out to rural 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 early as we talk today, it's sort of the the end of our busy season in the sense of, conferences and, and, and, having attended and observed the enthusiasm in the stretch and 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 simulation.

Obviously, behind that and in support of that and to our success, it will be dependent on our ability to continue to grow, and be there with tools that are, you know, right and, functional and 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, you know, those those are the the the underlying direct drivers in terms of what will be our top growth going forward is what we can achieve. Given specific guidance in that regard. Pointed out, come back to timing again each quarter with our objective here of stepping up our growth rate 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.

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

Speaker 1

Sure. I can handle that, Cameron. The, contingent consideration, that created the imputed interest was from the acquisition of Dilly Sips. They recorded a lower than lower than full price on some burnout calculations. That created the imputed interest, and now that has all been picked up through 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.

Speaker 0

Thank you, John. Final question we have as far as question is, can you talk about the overall landscape you're seeing for potential M and A opportunities? 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 spans both our software, but are are the nature of both the software nature as well as consulting opportunities and sometimes combinations that are out.

They scan companies with our resident headquarters here in The US and and and and some of them maybe in in other other territories I've spoken before in support of our expansion and building a bigger presence in the European marketplace with what 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 stair stepping that process a little bit little bit more quickly. It's a, you know, marketplace where there are a number of successful companies and attractive products and 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 we see it as a component of our strategy going forward and look forward to that point in time in which we may be able to present another opportunity.

This company has successfully grown itself over the last number of years with the addition of Cognigyne and Mendoza as acquisitions have turned out very successful for the company and its shareholders in the past and we look forward to continuing that trend going forward. It appears we have no additional questions at this point. Sean, I'll turn the call back over to you for closing comments. Yes. Just in closing, I believe we've had a very good closeout of our fiscal year.

The page turns quick, and we will be back with you after the New Year with the reporting of our first quarter and look forward to doing so and appreciate your interest in SLP and following of the company. Thank you much. 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+.com. Thank you, and have a great day.