What happened
Shares of Simulations Plus (SLP 1.41%), a specialized software company that serves the biopharmaceutical industry, had fallen 14.3% as of 11:37 a.m. EDT on Tuesday. Investors were caught off guard by service-segment revenue that declined during the company's fiscal third quarter.
So what
Simulations Plus reported fairly positive results for the three months ended May 31, with a glaring exception. The finicky services segment reported an 18% year-over-year decline due to late-quarter project delays and cancellations in drug development programs.
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Unfortunately, Simulations Plus doesn't expect its services segment to bounce back. The company lowered expectations for full-year earnings growth to a range of 5% to 10% over fiscal 2020. In April, the company said sales were on pace for growth in a range of 15% to 20% in fiscal 2021.
Today's losses would have been much larger if the company's software business hadn't grown revenue by an impressive 21% year over year. At $8.3 million in the fiscal third quarter, the higher-margin software segment was responsible for nearly two-thirds of total revenue.
Now what
Accelerating software sales that make up a growing portion of total revenue allowed EPS to rise much faster than total revenue. Over the past nine months, net income has risen 33% compared to the previous year.
Investors might want to think twice before trying to catch this falling knife. Simulations Plus isn't the only company out there with predictive software for the biopharmaceutical industry.
Despite the recent beatdown, shares of Simulations Plus are still trading at around 20 times trailing sales and 84 times trailing earnings. That means there's a long way to fall if investors catch further hints of slowing growth ahead.
