Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Simulations Plus Inc  (NASDAQ:SLP)
Q1 2019 Earnings Conference Call
Jan. 09, 2019, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Cameron Donahue -- Regional VP and Partner

Good afternoon, everyone. Thank you for joining us. Hosting the call today is Simulations Plus's CEO, Shawn O'Connor, and the company's CFO, John Kneisel.

Before beginning, I'd like to remind everyone that with the exception of the historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties.

The actual results of the company could differ significantly from these statements. Factors that can cause or contribute to such differences include, but are not limited to, continuing 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 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, I'd like to turn the call over to Shawn O'Connor. Shawn?

Shawn O'Connor -- CEO

Thank you, Cameron. This was a strong start to what we expect to be another record year for Simulations Plus. We continued our long tradition of profitable growth and returning capital to shareholders. We delivered a record $7.5 million in revenue for the first quarter, up 6.6% compared to the same quarter in the prior fiscal year. Our software revenue growth was strong for the quarter at 10% versus the same period last year.

Our consulting revenues were up 3% for the quarter compared to last year, constrained by resource capacity and two key project initiatives that slipped out of the quarter. Overall, our 6.6% revenue growth in the first quarter of 2019 is in line with our historical annual revenue growth in the 10% to 15% range on an annual basis.

The two key projects initiations I referred to are both in our DILIsym division. The first, our RENAsym project that is funded by the previously announced $1.7 million SBIR grant completed it's Phase 1 effort during the quarter, at which point review of the effort was required before initiating Phase 2. Work effort was suspended, awaiting Phase 2 approval, which was not received until after quarter-end. Phase 2 which includes $0.9 million of funding for 2019, has now been initiated and is fully staffed.

The second is a new contract with a large pharmaceutical company that closed just recently. Under this agreement, DILIsym will develop a QSP model that will provide the ability to predict efficacy of drugs being developed to treat idiopathic pulmonary fibrosis. The development is funded by our large pharmaceutical company partner for up to $2.7 million over the next two-plus-year time frame. Upon completion, DILIsym will retain the rights to the model to market on a software licensing or consulting service basis to the rest of the industry. We expect this project to contribute significantly to 2019 revenues.

Demand for our consulting services remained strong and these are just two examples of that demand. I spoke last quarter of the challenge of meeting the services demand with the growth of our consulting resources to deliver on these opportunities. We have grown staff 9% year-over-year and during the quarter brought on board new staff, as well. That new staff historically have a ramp-up time before they become fully billable and our margins reflected that this quarter. And we continue to seek additional qualified staff to support this side of our business.

While software-related revenue grew faster than consulting revenues this quarter, our forecast anticipates the consulting revenue growth will outpace software revenues over the course of the full fiscal year. And we have sales pipeline which supports this expectation. First quarter revenue growth was strong in the context of our historical seasonality trends and we are in line with our historical organic annual growth in the 10% to 15% range on an annual basis.

Our gross margins were slightly up for software revenue at 79% compared to 78% in the year-ago quarter. But our consulting margins declined to 61% compared to 72% in the year-ago quarter. This decline was due to several factors. The aforementioned ramp up to normal billability levels for new staff, increased CRO costs at DILIsym, increased training revenues at Lancaster, and increased reimbursable client expenses at Cognigen, all of which are lower-than-average service margin revenue components.

That said, our consulting margins this quarter are consistent with consulting margins reported for the last three quarters, and do not indicate any significant change in margin expectation for 2019. Our 72% service revenue margin in the first quarter of last year was the highest experienced by the company. We expect service margins for this year to remain at or improve slightly over last year's service margin on a full-year basis.

During the quarter, increases in SGA and expenses were related to increased revenue from international distributors, with resulting higher commission expenses, as well as increased personnel costs in general. It was a very active quarter with regard to conference attendance and workshop activity. All of these efforts are in support of future revenue growth. And I would expect the SG&A expense to normalize toward historical annual rates for 2019.

And finally, our investment in our R&D spending, while up as a percentage of revenues from last year's first quarter, continue to trend levels -- to trend at levels consistent with the last three quarters of fiscal 2018. Bottom line, I believe the first quarter saw success at the top line and we have initiated several endeavors which will support the full-year outlook for the company.

Turning to our fiscal first quarter results consolidated and by division. Consolidated revenues for the quarter reached $7.5 million with a growth rate of 6.6% year-over-year. The mix of revenues changed slightly with software revenues up 2% to 55% of total revenues and consulting services down slightly to 45% from 47% last year.

Net income before taxes was $2 million, or 27% of revenue for the quarter, and our earnings per share was $0.09 in Q1 2019. We anticipate these metrics will return closer to historical levels for the year as a whole. We generated $2.6 million in cash from operations for the quarter and continued to return capital to shareholders through a quarterly dividend.

In addition, during this period, we paid out $1.6 million in scheduled acquisition payments to DILIsym. The company had cash on hand at the end of the quarter of $9.4 million. At quarter end, the company had 96 employees representing a 9% increase from the same time last year. Our Lancaster division revenues were up 8% year-over-year, reflecting 7% growth in software and a 12% increase in consulting services. This division of the company represented 58% of revenues and 74% of EBITDA for the first quarter of 2019.

The quarter's revenue breakdown was as follows. 69% renewal, 15% new licenses and 16% consulting. Software renewal rates followed historical strong trends at 84% of accounts and 94% of fees. We continue to enjoy excellent long-term relationships with our customers and benefit from very low churn rates, as a result.

New license units for the quarter were 210, up 6% year-over-year. We added seven new commercial companies and 20 non-profit groups this quarter. New customer being either a new company or a completely new geographical division of a current customer. We ended the quarter with a headcount of 40 at Lancaster.

Our Buffalo division revenues were up 5% for the quarter year-over-year. This division of the company represented 27% of revenue and 14% of EBITDA for the first quarter of 2019. We acquired three new clients during the quarter and initiated 14 new projects. The division currently has 31 project proposals outstanding with 26 companies.

We ended the quarter with a headcount of 40 in Buffalo.

Our DILIsym division revenues were up 1% in the quarter. This division of the company represented 15% of revenue and 12% of EBITDA for the first quarter of 2019. The quarter's revenue breakdown was as follows, 75% DILIsym software and projects, 14% NAFLDsym software and projects, and 11% RENAsym grant. We ended the quarter with a head count of 16 at RTP.

Let me now now turn the call over to John to review some detailed financial results. John.

John R. Kneisel -- Chief Financial Officer

Thanks, Shawn. The consolidated net revenue for our first quarter of the fiscal year were up 6.6% as Shawn as said. It's approximately $467,000 to $7.5 million compared to $7.1 million for the prior year. By divisions Lancaster revenues were up 8% to $4.4 million, Buffalo revenues were up 8% to $2.1 million, and as Shawn said RTP revenues were slightly up. Consolidate software and software-related revenues were up $365,000, just under 10%. The consulting service revenues were up $102,000 or 3.1%.

During this quarter, we completed our implementation of the new revenue standard ASC 606 revenue from contracts with customers. This had minimal impact on our current revenue. We expect it may have some impact on the timing of revenue recognition and service revenue margins on certain contracts going forward. But we don't anticipate significant changes to our annual historic service margins due to the minimal number of projects for which the standard changed revenue recognition.

We used the retrospective method to make the adjustment. This method allows for an adjustment to beginning retained earnings for the effect of the implementation. The total adjustment to retained earnings was about $690,000, a portion of that adjustment will become future revenue over the life of the contract. Gross profit increased slightly, remaining a strong $5.3 million in the first quarter of fiscal 2018 -- 2019, for this fiscal quarter. Sorry about that.

Our cost of sales increased this quarter compared to the prior year due to the growth in labor count, salaries and benefits. That increase accounted for about $310,000. Additional software amortization was about $54,000 and we incurred $80,000 of direct contract costs the majority for testing on related contracts in North Carolina division. Gross profit margin for the first quarter of fiscal 2019 with 70.8% compared to 75.4% in the prior year. The decrease was primarily the result of the increased staffing to meet the demands of the modeling and simulation projects, Shawn spoken about, and anticipated growth in this area of our business. SG&A expenses were $2.2 million or 36.1% of revenue for the first quarter of the fiscal year, an increase of $311,000, about 12.9% compared to $2.4 million or 34.1% of revenue in the first quarter of fiscal year 2018.

The increase in SG&A expenses comes somewhat from increased licenses and commissions on sales in Asia, but was primarily a result of wage and salary increases from stock comp, increased costs of a new full time CEO and increased headcount in the divisions, as well as higher part percentage of G&A allocation. Scientific personnel spent a little bit more time on G&A. These increases were partially offset by decreases and some trade show expenses that we saw in the period.

Research and development. During the period, we incurred $984,000 of R&D costs. Of that amount, we expensed $530,000, which represented about 7% of our revenue. An increase of $168,000 or 46.8% increase over the prior year in the expense portion, which was 5.1% of revenue in the first quarter last year. This increase in research and development expenses was primarily result of costs associated with research activities in North Carolina.

Income from operations for the first quarter of fiscal '19 was $2.1 million, down $477,000 or 18% compared to $2.6 million in the year-ago quarter. It's primarily result of the increased labor costs as we've been building staff and investing in R&D projects. Our provision for income taxes was $486,000. It was at an effective annual -- effective rate of 24% in the quarter compared to $801,000 in the prior year. That rate last year was just about 32%. That tax rate decrease is attributable to the new tax act that became effective January 1 of 2018. And those lower taxes have allowed us to invest in the operations of the business.

Net income decreased by $180,000 or 10.5% to $1.5 million for the recent quarter compared to $1.7 million in the year-ago quarter. On a per share basis, net income was $0.09 per diluted share this quarter compared to $0.10 a year ago down $0.01 per share. EBITDA was $2.8 million in the first quarter of 2019, down 13.8% compared to $3.2 million in the prior year.

Next turning to Slide 10. This is our revenue by quarter. The slide represents our revenue on a quarterly basis, that goes back to 2015 through the most recent quarter. It illustrates really the seasonality of the business with our third quarter typically being our strongest and a drop off in the fourth quarter, coinciding with the typical shutdown in our clients purchasing and project activities during the summer months.

It also illustrates an unseasonably high growth in the fourth quarter of 2017, which was sourced from our Buffalo Division, as well as the first quarter including the results of our RTP division in June of 2017. On the next slide, 11, is a view of our income from operations by quarter. This data again represents a general track record of increases both for year-over-year and sequentially through the first and third quarters with the fourth quarter typically the lightest of the year.

Next slide on net income by quarter. We see a similar pattern with the third quarter typically being the strongest. We shaded the effect of $1.5 million deferred tax benefit we received last year, as it tends to skew the presentation without calling out that difference. The next slide, 13, diluted earnings per share as would be expected, follows the tracks with the same pattern of net income.

So we look at EBITDA on Slide 14. That also does follow the same metrics as the others. Moving on to Slide 15, this represents our worldwide view of sales, the majority of our revenues in North America. You can see that Asia and Europe are strongly represented, but we also see them as a growing source of revenues for the company.

In Slide 16, we provide this chart on a quarterly view of cash and cash outflows for dividends and acquisitions, and the impact of cash balances over the last four years. We've actually put out over $30 million in cash over the last five years. This chart shows the period for the last four years in it. So beginning in the first quarter on the left side of 15, the blue bars at the bottom illustrate a consistent dividend payout and then beginning in 2018, the Board increased the quarterly dividend payment to $0.06 per share up from $0.05 per share in those other periods of time.

Moving up the chart, the red bar represents cash used for acquisitions. We spent nearly $15 million over the past four to five fiscal years on acquisition and acquisition-related projects. Most notably, this slide has been our ability to not only to return cash to our shareholders through consistent dividends, we've been able invest in growth for the future through acquisitions while maintaining a healthy balance sheet with ample cash. We've had zero borrowed debt and we continue to increase the value of the company. And just today, with the earnings announcement, we announced our next dividend, which the Board voted on, and we will distribute $0.06 a share quarterly dividend payable February 1.

Now I'll turn the call back to you, Shawn.

Shawn O'Connor -- CEO

Thank you, John.

In summary, this was a solid quarter for Simulations Plus, with good revenue growth reflecting the typical seasonality we have historically experienced. Our revenue outlook is positive and tracking to our growth expectations for 2019. During the quarter, we initiated efforts to recruit additional staff and support of our service businesses and invested in our sales and marketing efforts. These investments impacted our expense in this quarter, but will position as well in quarters ahead to achieve anticipated profitable growth.

Certain expense lines like R&D will remain higher, but expected revenue growth in coming quarters should move us back toward historic profitability levels as expenses as a percentage of revenues are more in line with historical levels. This was a good start for fiscal 2019.

Will now open the call up for any questions you might have. Cameron?

Questions and Answers:

Cameron Donahue -- Regional VP and Partner

Thank you, Shawn. (Operator Instructions)

Our first question is for the Lancaster division. What was the revenue renewal rate and how many new licenses were sold in the quarter?

Shawn O'Connor -- CEO

That was in the prepared speech. I'm just flipping to page. The renewal rates on accounts were 84% and fees were 94%. New accounts for the quarter were 210, which was up 6% from the year-ago quarter.

Cameron Donahue -- Regional VP and Partner

Thank you. Is the 210 number, that's the new accounts for the quarter? I believe that might be the total accounts.

Shawn O'Connor -- CEO

New license units for the quarter.

Cameron Donahue -- Regional VP and Partner

Great. The second question. Is the aggregate level of first quarter '19 SG&A and R&D expenses the new baseline going forward, or just incremental sequential increases?

Shawn O'Connor -- CEO

I think they're, if I understand the question right, incremental end of the first quarter here. We've initiated some investments in our service -- in the organization in the sales and marketing effort. And as revenue steps up in the second, third and fourth quarter of 2019, on a percentage basis of revenues, we will come back in line with historical percentages. SG&A as an example stepped up to about 36% in the first quarter. Historically we've been in the 32% to 34% range. And I would anticipate that during the course of the year, for the year as a total will come back to that level. The exception there is R&D expense which we saw step up midpoint of last year and that expense level will continue into 2019 at this new percentage of revenue rate.

Cameron Donahue -- Regional VP and Partner

Thank you. The next question for the KIWI offering, how is the potential customer pipeline taking shape beyond the current five-year project you're currently implementing?

Shawn O'Connor -- CEO

We continue to market KIWI in an aggressive, but slow pace in the marketplace as the product is developed with feature functionality that's being funded through our client funded efforts that product becomes more functional more useful in the marketplace. And toward at the end of it with the addition of these features we think it'll be more marketable. It is in the marketplace, a very muddy marketplace. And what I mean by that is that there are several offerings of that nature of the KIWI's purpose in the marketplace. But probably more importantly the large pharma companies all have internal internally developed products that serve these purposes.

So the sales and marketing effort is not -- is a two-step process of not only demonstrating the prowess of our product against other competitive products, but also in terms of convincing the large pharma displaced there internally built systems with the third-party piece of software. So I still feel good about the direction that we're headed at this point in time. But the pace is going to be impacted by this two step process in the marketplace.

Cameron Donahue -- Regional VP and Partner

Thank you.

The next question. What role should the release of DILIsym version 8A, which was released like two days ago, play into the future growth opportunities?

Shawn O'Connor -- CEO

I think our release there demonstrates our ability to -- on a very rapid pace process, almost annual basis if not better, in some regards, deliver new releases out there to our marketplace with new functionality across our products that enhance not only the abilities that are in the hands of our installed base, but has the potential to extend into multiple hands new cubicles, new scientists functionality that they will find useful and support future new sales in those products. This quarter was DILIsym version 8. And we expect with each quarter, a schedule of release of updates to all of our products.

Cameron Donahue -- Regional VP and Partner

The next question is what percentage of staff growth for this year do you anticipate?

Shawn O'Connor -- CEO

I hesitate to put out a number there. We are aggressively recruiting on the consulting side. Our 9% year-over-year growth experienced here in the first quarter is something that we'll be shooting for the year. It will be dependent upon our success rate on the recruiting side, but it will be something of that magnitude.

Cameron Donahue -- Regional VP and Partner

Thank you. The next question is, is there any additional news or updates on the MRI or missile guidance applications?

Shawn O'Connor -- CEO

I would characterize it that our effort there is still exploratory in terms of utilizing our AI and machine learning technology that has already developed and searching for new applications and new extensions of it, be they in those particular areas or remaining within the life sciences arena, while we are investing some time and effort in that. There is nothing of note to update with this quarter, other than progress that we're making in terms of identifying potential opportunities. But too early at this stage to speak to at this point.

Cameron Donahue -- Regional VP and Partner

Thank you. And our final question today is big picture question. In your view, how far long is and is the acceptance of simulation software applications within the drug development process?

Shawn O'Connor -- CEO

In general and globally, the adoption is there conceptually in the implementation of a model-based drug development. And the marketplaces is moving rapidly forward. And while we've seen some great success across the industry over the last number of years, we're very early stages in terms of the depths of its penetration and fullness of its application. Specifically with regard to our offerings in the marketplace, we have reported in the past evaluations that we've done in terms of the penetration of our products and those that have always worked out to be 20% or thereabout penetration in terms of number of scientists that potentially could make use of GastroPlus as an example.

So both as industry as a whole and specifically with regard to Simulations Plus, model-based drug development is accepted and the implementation process has begun, and our clients in the marketplace in general are moving rapidly to do so. But I would say that we are still in the early stages of seeing it being fully implemented if you will.

Cameron Donahue -- Regional VP and Partner

Thank you. That concludes the Q&A session.

One final note before we end. Shawn O'Connor, SLP's CEO will also be presenting at the Needham conference next Wednesday, the 16th. 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-plus.com. Thank you.

Duration:29 minutes

Call participants:

Cameron Donahue -- Regional VP and Partner

Shawn O'Connor -- CEO

John R. Kneisel -- Chief Financial Officer

More SLP analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.