Symyx Homes In on the Right Mix

Symyx Technologies (Nasdaq: SMMX  ) , a pioneer in the field of high-throughput technologies and research software that helps customers in the chemical, energy, and pharmaceutical sectors maximize the effectiveness of their R&D programs, reported quarterly earnings on Oct. 24. Revenues for the third quarter were down almost 8%, from $31.7 million a year ago to $29.5 million this past quarter.

For the year, though, revenues are up $8 million to $85 million, and the company is projecting a solid fourth quarter with expected sales of $40 million-$42 million. The good news is that if the figure holds, 2006 revenues will be $125 million; earnings will be $0.22 cents-$0.24 cents per share; and year-to-year revenue growth will be 10%. The bad news is that at the beginning of the year, analysts were expecting earnings of $11 million -- or $0.33 cents per share -- and revenues to clock in around $135 million.

As a result, the stock is about 15% lower than where it was at the start of the year.

So what is a Fool to make of this mixed bag? Is Symyx an underachiever that has failed to live up to its potential, or simply a late bloomer that is just now beginning to come into its own?

I believe it is the latter, and have recently added Symyx to "outperform" on my CAPS profile.

The promise is becoming a reality
Symyx's instrumentation, software, and methods can generate hundreds of thousands of unique materials at a time and then rapidly screen those materials for desired properties. The story has long been that this could save customers time and money, both by reducing R&D expenses and by finding new materials that could be exploited by the customers to improve their existing products and/or develop better manufacturing processes.

After listening in on the earnings conference call on Tuesday, it now appears the company is delivering on this promise. Using Symyx's technology, Dow Chemical (NYSE: DOW  ) recently won the chemical industry's prestigious Perkins Medal for a new material that is now in commercial development. Merck (NYSE: MRK  ) cited the role Symyx's tools played in developing a new catalyst that generated significant cost savings, and Bristol-Meyers Squibb (NYSE: BMY  ) recently published a paper explaining how the software could increase the pharmaceutical industry's productivity.

Most significantly, however, ExxonMobil (NYSE: XOM  ) reported that Symyx's "high-throughput experimentation is capable of speeding research by up to two orders of magnitude."

This is important because ExxonMobil and Dow Chemical remain Symyx's largest customers and account for a lot of its revenue. Couple this news with the fact that Symyx has already developed a catalyst that allows ExxonMobil to more easily refine oil, and helped Dow create two others that aid in the production of two different types of plastic, and it suggests that both companies are likely to renew their deals with Symyx (which are set to expire in 2008 and 2009, respectively).

A diversified platform for future growth
Another reason to be bullish on Symyx's long-term prospects is the diversity of its clients. In addition to the chemical, pharmaceutical, and oil industries, the company also has clients in the electronics, automotive, and consumer goods sectors.

Most of these clients have proprietary arrangements with Symyx, so it is impossible to discern who they are, but investors should be interested to know that Symyx has signed on 30 new companies this year alone.

None of these deals are anywhere near the size of its Dow or ExxonMobil contracts, but they do represent a nice platform from which to expand. Not only do they provide Symyx with an opportunity to grow the sales of its software and tools, they also represent a potential source of future royalty revenues. As an added benefit, these smaller companies represent a hedge against the more cyclical nature of the chemical and oil businesses.

A growing royalty revenue stream
One of the biggest challenges in assessing the value of Symyx's stock has always been trying to get a firm grasp of the potential of these royalty opportunities. In the conference call, CEO Steven Goldby suggested that annual royalties of $40 million to $50 million were likely to be achieved by the end of the decade. He further added that those figures could double shortly thereafter.

If true, this is very promising news. The problem, of course, is that it is always easy to be bullish when looking out three or four years. The risk is that, for any number of reasons, such revenue streams won't materialize.

Personally, I would be more comfortable if the company could demonstrate some tangible proof of success beyond its current arrangements with Dow and ExxonMobil. Specifically, I would like to see it help a major pharmaceutical company formulate a new blockbuster drug or create a new nanomaterial that improves a drug's solubility -- and thus effectiveness.

Foolish bottom line
With those risks in mind, I still like the company's chances. It has $140 million cash on hand; its relationships with both Dow and ExxonMobil are strong and appear likely to be renewed; it has a growing number of new, albeit smaller, customers; its technology is demonstrating success in the commercial marketplace; and it is well-diversified across a number of industrial sectors.

If you believe, as I do, that new nanomaterials and nanocatalysts will have a big impact on the chemical, oil, and pharmaceutical industries in the near future, Symyx remains one of the better ways to play this hunch.

Interested in other nanotech-related Foolishness? Check out these articles:

Dow Chemical is aMotley Fool Income Investorselection. Take a 30-day free trial to find out why. Merck is a former Income Investor pick.

Jack Uldrichis the author of two books on nanotechnology, including Investing in Nanotechnology: Think Small, Win Big. He owns stock in Symyx, but not in any of the other companies mentioned in this article. The Fool has a strict disclosure policy.


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