Simulations Plus, Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Apr 2021

[Operator:]

Greetings and welcome to Simulations Plus, Second Quarter Fiscal 2021 Financial Results Conference Call and Webinar. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jeff Stanlis from Hayden IR. Thank you Mr. Stanlis, you may now begin.

[Jeff Stanlis:]

On behalf of Simulations Plus, I welcome you to our Second Quarter Fiscal 2021 Financial Results Conference Call and Webinar. Hosting the call today are Simulations Plus' CEO, Shawn O'Connor; and the company's CFO, Will Frederick. An opportunity to ask questions will follow today's presentation.

[Shawn O'Connor:]

Thank you, Jeff. This was another strong quarter for Simulations Plus, and a solid first half to our fiscal year. We delivered 27% year-over-year revenue growth, bolstered particularly by the software side of our business. The solid growth, the inherent leverage of our business model, and the greater mix of higher margin software revenue led to improved profitability. One of the highlights of the quarter was the successful launch of our MIDD+ scientific conference in early March, a two-day event focused on delivering customized modeling and simulation content, specifically for pharmaceutical scientists and their organizations. This event, our first Simulations Plus sponsored event, demonstrated our leadership in the industry. More than 500 commercial and academic professionals participated with tracks including dedicated sessions covering all stages of the drug development process including discovery, pre-clinical, first in human, Phase-I, proposed approval, and generics. In addition, this conference included a strong presence and active participation from regulatory agencies, including representatives from the U.S. FDA, Offices of Clinical Pharmacology, New Drug Products, Research and Standards, Translational Sciences, Center for Drug Evaluation and Research, and the National Center for Toxicological Research, as well as ANVISA and Health Canada. Another highlight was the release of our inaugural ESG report which you can find on our IR website. This report demonstrates our commitment to good governance, diversity, transparency, and our shareholders. I'm proud of this report, something still rare for companies of our size as the ESG movement continues to find its form. We have adopted the mission of achieving our long-term goals for growth, profitability, and industry leadership through innovative science-based software and consulting solutions to optimize treatment options that will both save and improve the quality of patients' lives.

[Will Frederick:]

Thank you, Shawn. Our consolidated revenue for the second quarter was up 27% to $13.1 million, compared to $10.4 million in the prior year quarter. Total gross profit increased 33% to $10.2 million representing a 78% gross margin in the second quarter of fiscal 2021 compared to a gross margin of 74% in the same quarter last year. SG&A expenses for the quarter were $5.4 million or 42% of revenue compared to $4.1 million or 40% of revenue in the same period last fiscal year. The increase in SG&A expenses was primarily the result of higher payroll related expenses due to increased compensation and headcount, as well as increases in contract labor, insurance and professional fees. R&D expenses for the quarter were $1.3 million or 10% of revenue, compared $2.7 million or 7% of revenue in the same period last fiscal year. Capitalized R&D for the quarter was $0.7 million or 5% of revenue compared to $0.6 million or 4% of revenue in the same period last fiscal year. Income from operations was $3.5 million, an increase of 23% compared to $2.8 million in the same period last fiscal year. This increase was primarily driven by a higher gross margin on increased revenue, which was partially offset by an increase in operating expenses. The provision for income taxes was $0.2 million for an effective tax rate of 6% compared to $0.7 million for the same period last fiscal year, which was an effective tax rate of 24%. The lower effective tax rate was primarily driven by the tax benefit associated with disqualifying dispositions that we saw again this quarter similar to last quarter. Excluding this benefit, the effective tax rate for the quarter would have been closer to 21%. We expect to see the rest of the year effective tax rate in the range of about 15% to 18%, subject to other factors, including profitability and any additional disqualifying dispositions. Net income increased 49% to $3.2 million, compared to $2.2 million for the same period last fiscal year. And diluted earnings per share increased 25% to $0.15 compared to $0.12 for the same period last fiscal year. EBITDA increased 23% to $4.3 million compared to $3.5 million for the same period last fiscal year. Our consolidated year-to-date revenue was up 21% to $23.8 million, compared to $19.8 million in the prior year period. Total gross profit increased 28% to $18.5 million, representing a 78% gross margin in the first half of fiscal 2021 compared to a gross margin of 73% in the same period last year. SG&A expenses were $9.9 million or 41% of revenue, compared to $7.6 million or 39% of revenue in the same period last year. Similar to Q2, the increase in year-to-date, SG&A expenses was primarily the result of higher payroll related expenses due to increased compensation in headcount as well as increases in contract labor, insurance and professional fees. R&D expenses were $2.1 million or 9% of revenue, compared to $1.3 million or 6% of revenue in the same period last year. Capitalized R&D was $1.4 million or 6% of revenue, compared to $1.1 million also 6% of revenue in the same period last fiscal year. Income from operations was $6.5 million, an increase of 18% compared to $5.5 million in the same period last year. Similar to Q2, this year-to-date increase was primarily driven by a higher gross margin on increased revenue, which was partially offset by an increase in operating expenses. The provision for income taxes was $0.7 million for an effective tax rate of 11% compared to $1.4 million for the same period last year, which was an effective tax rate of 24%. As mentioned earlier, the lower effective tax rate this year was primarily driven by the tax benefit associated with disqualifying dispositions. Net income increased 35% to $5.7 million, compared to $4.2 million for the same period last year. And diluted earnings per share increased 17% to $0.27, compared to $0.23 for the same period last fiscal year. EBITDA increased 17% to $8.1 million compared to $6.9 million for the same period last year. As Shawn previously mentioned our total gross margin for the quarter increased from 74% last fiscal year to 78% this quarter. This increase was driven by 89% gross margin for our software, business and 61% for our services business. We also saw an increase in our year-to-date gross margin from 73% last fiscal year to 78% this year. This increase was driven by 88% gross margin for our software business and 63% for our services business. We continue to have a strong clean balance sheet. At the end of the quarter, our cash and short-term investments balance was $117.8 million, compared to $116 million at the end of last fiscal year, reflecting significant cash reserves to support our continued expansion through internal investment and M&A activity. We also continue to have no debt on the balance sheet. I'll now turn the call back to you. Shawn?

[Shawn O'Connor:]

Thank you, Will. In conclusion, we delivered strong revenue growth in Q2 and the first half of fiscal year ‘21. The richer mix of software revenues is enhancing our profitability metrics nicely. And we continue to advance our leadership position in the marketplace, with business development momentum, winning new business, renewing and growing existing relationships, key collaborations and grants. And we successfully launched our first ever sponsored conference. As a result, the underlying momentum we see across our entire portfolio of software products and services is encouraging. With that, I'll be happy to take your questions. Operator?

[Operator:]

Thank you. We'll now be conducting a question-and-answer session . Our first question comes from Matt Hewitt with Craig-Hallum. Please proceed with your question.

[Matt Hewitt:]

Good afternoon. Thanks for taking the questions and congratulations on the progress. First up, it's almost a year now since you acquired Lixoft and I'm just curious of how the cross-selling is going between the two primary software programs, but how is the growth that you're seeing in Lixoft, is that organic isn't the word -- but is that customers coming and looking at Lixoft and acquiring it or is it because of the cross-selling initiatives that you’ve put in place?

[Shawn O'Connor:]

Yes, thanks, Matt. All of the above would be my starting point. We’re getting good contribution from all of those sources. Remember, Lixoft had a good growth rate coming into the organization. So, a lot of momentum in the marketplace, a lot of adoption by both new customers as well as growth as the typical sale of Monolix is a handful of user licenses for a period of time to test and get comfortable and then a follow-on renewal at a much higher user count. And so that dynamic was there and is continuing, been very pleased in terms of the interaction between Lixoft and our Sim Plus division, our software sales team supporting GastroPlus, ADMET Predictor. Number of opportunities have been created to introduce Lixoft to new accounts and some vice versa, the other way in terms of Lixoft accounts that have provided some more exposure on the Sim Plus side.

[Will Frederick:]

And overall, we are very much focusing as the next step in terms of our development of sales and marketing efforts, cross-selling programs that are focusing on key large accounts and organizing meetings, interaction with them that provides clients of one or more of our products and services to the visibility of other services that they might not be using, so that's been very good to-date. And then lastly I'd comment that the benefit in terms of our excel point on Monolix is the efficiency that it can bring to the pharmacokinetic modeler in terms of performing their work effort. And in that regard, we are stepping up ourselves internally and adopting Monolix at a pretty rapid pace where we're able and the performance of our client projects, I mentioned in the script, in a way dozen accounts or a dozen projects, I should say this last quarter where we utilized Monolix as the primary data analysis tool. That's an important, not just efficiency in terms of our internal speed and profitability on projects, but it's also another one of those cross-selling means of demonstrating and getting Monolix and its functionality in the eyes of our consulting clients and opening their eyes to the opportunity of adopting it as their tool in-house as well. So overall, from a number of different angles and sources, the interaction that – yeah it is now a year old there since our acquisition of Lixoft in April of last year has been very, very positive.

[Matt Hewitt:]

Well, that's great. Thank you for the update there. And then maybe one separate question, given the mix is - it sounds like it's going to remain elevated here towards favoring the software side at least for the near term or the second half of the year. Should we anticipate that the gross margins are going to be kind of, up by that 78% kind of ish range for the second half as well or is there something else that could maybe knock the gross margins down? Thank you.

[Will Frederick:]

Sure, Matt. No, I mean, we should see the benefit of that which are maxim , direction of the software contribution to revenues most definitely. Keep in mind in terms of the year-over-year comparisons that now we’ve entered the third and fourth quarter, and so the growth rate on the software side, Lixoft is no longer purely acquisition growth, if you will. So, the software growth while good and will continue to perform and as I said, in terms of the guidance, at or above the guidance that we gave at the beginning of the year, it's performing ahead of plan. Don't look at the 45% growth in the second quarter. Keep in mind, this very next quarter will have some Lixoft revenues than the prior year comparable that will bring that percentage -- year-over-year percentage down, but nonetheless, the organic growth rate and Lixoft’s growth rate on a standalone basis will continue quite strong here.

[Matt Hewitt:]

Great. That's helpful. Thank you.

[Operator:]

Our next question comes from Francois Brisebois with Oppenheimer. Please proceed with your question.

[Francois Brisebois:]

Hi, thanks for taking the question. Just to touch on what Matt mentioned there, the cross-selling obviously on the software side, there's some cross-selling between software products or offerings, but how much of it is pushing? Also, you talked about the consulting business? How much of that cross-selling can go to the services side? And is that something, to tie it into an M&A question? What exactly are the criteria that you're looking for? And, is the, the performance of Lixoft maybe changing what you're trying to look for here?

[Shawn O'Connor:]

Boy, you are coming at several different angles there Franc in one question, congratulations. Good question. Yes, the dynamic of cross-selling from Lixoft to the consulting business, as I indicated before it is presenting opportunities. There were -- at the time of the acquisition, one of the opportunities going forward was the fact that Lixoft was turning away requests, inquiries by their clients for service-related effort that Lixoft was not staffed up or in a position to support. And so, inquiries to Lixoft now have a home, and that's primarily Cognigen, and go into the lead and sales pipeline to be followed up, and we've seen some good, good activity there. And then, on the other side to the demonstration of Monolix, in the performance of existing consulting business, in front of our clients is a tremendous sales opportunity to demo. It's not a cold call, and can we demo Monolix, it's a warm relationship and a consulting engagement and a demonstration of the merits of Monolix to a friendly existing client. And that is, there's a very large leverageable opportunity that we're working as well. So, feel very good there both on the incremental software cross selling as well as on the consulting side, that opportunities are being presented to itself following on to Lixoft’s acquisition a year ago. As it relates to M&A, does it change our perspective in terms of our M&A criteria? I think our acquisition of Lixoft was very positive --- and checked amost all the boxes not only at the time of the acquisition, but a year later, looking back and in hindsight, the performance and contribution has been better than expected. And so yeah, those are acquisitions we'd want to do on a daily basis so to speak, I don't know that it necessarily changes, however, the criteria that we're running with here. We continue to look for good strategic fit, good cultural fit, we've got a bias towards software entities that can contribute and add to, our desire to be, the premier software tool provider to the industry and in bio-simulation services, by consulting opportunities to have their merits as well. Often, it's geographical in terms of extending our footprint in Europe or perhaps in the Asia region. And then finally, there are services, bio-stimulation services that through acquisition, we could expand into new but related areas. So, all of those criteria remain the same. We've certainly enjoyed the experience from Lixoft and look to replicate that. But I think that's where we were last year. And that's where we continue to be today.

[Francois Brisebois:]

Okay, great. And I'll just sneak in another one, you actually hit on all of those. So - there, but the software and services mix is something that comes up a lot. Can you talk about, you're obviously talking about 2021? But is this something that, maybe on the low side on the service grows, maybe on the high side on the software side, but if we're looking at 2022, 2023,2024,2025 down the road, can you share any thoughts about what would be an ideal mix of software and services?

[Will Frederick:]

Like where we've landed back at the 60/40, we, over the last couple of years, with some accelerated growth on the service side. While we were investing in sales and marketing to enhance the growth on the software side, we saw that that mix percentage come down from close to 60/40. But down, I think at its low points, it was even 49% software 51% service, if I'm remembering correctly, and --recalibrated that and today, we're supporting that with an enhancement in our organic growth on the software side as well. Obviously, there's benefits there in terms of the overall profitability of our model that we'd like to take advantage of. And in the long run, we strive to maintain this 60/40 very inevitably will be some ebbs and flows in the quarter-to-quarter results there of that 60/40 would be the mantra that we would march to.

[Francois Brisebois:]

Okay, great. And then any comments you can share on the pandemic on, maybe businesses, backlogs, and maybe new business or hiring any updates. I mean, there's been obviously such, you guys have been kind of sheltered from the impact of COVID. A little bit, but any updates there from your perspective?

[Shawn O'Connor:]

Yeah, I can't point to anything significant that's new or different, as we're all experiencing, it's sort of a mishmash of opening up and closing down as you walk around the world to various places our employees at Lixoft in Paris back to in locked down for so long and can't go more than six miles from, their front door. From a business perspective, I think there's been a settling in an increase in activity, moving on. Getting through the annual budgeting process, allowed our clients to sort of step back and take a deep breath and say, Okay, well, what's the program going to be on a go forward basis over the next year? What's that budget going to be? So there's a little bit more fluidity to business if that's the right term. At the same time, it doesn't take much for companies to pull back and say, we're cautious, we're going to wait till next quarter. There's still the impact in terms of we've not been able to face-to-face see our clients and conference industry conference, and the impact that we felt in that regard for the last year so getting better at it, but still impactful. So, it's still a mishmash. We're learning to fight our way through it, but still have some impact.

[Francois Brisebois:]

Okay, and I apologize, I lied. I'd like to sneak in one last one. That's okay. Is the $4 million revenue growth in the first half year, first six months of the way you report, do you break out the contribution there from lists off and embellish?

[Will Frederick:]

It was 1.6 in the second quarter. And I don't know if we'll maybe get first quarter visibility there. I don't have that cheat sheet exactly in front of me. It was somewhere less than 1.6 in the first quarter.

[Francois Brisebois:]

Okay.

[Shawn O'Connor:]

Yes, It was one point, we'll put it out in our 10-Q on Wednesday, as well, you’ll have all that detail.

[Francois Brisebois:]

Just trying to gauge if most of that growth is all Lixoft or the organic side, how much of it is organic versus Lixoft?

[Will Frederick:]

Understand, all those details will come forth. And we're the Lixoft group, they're, their growth is accelerated just by the momentum that they've had. They've also had some accelerated situations where clients have wanted to increase licenses. And so doing, the renewal may not have come up until third or fourth quarter, but we want more licenses. So let's renew it now in the second quarter. Bigger dollar contract licenses total and accelerated forward. So yeah, we're good businesses momentum is good on Lixoft side. They're sort of learning to become a public company, though, in terms of the quarter-to-quarter revenue process. And so as we work into the back half of the year, the most important factor is, keep in mind, there's Lixoft revenue in our comparison from the prior year. So that's going to impact that overall growth rate, but not necessarily the momentum underneath.

[Francois Brisebois:]

Yes, understood. All right, thank you very much.

[Operator:]

Our next question comes from David Windley with Jefferies. Please proceed with your question.

[David Windley:]

Hi, Good afternoon. Thanks for taking my question. I believe I heard you say in your prepared remarks that maybe some companies specific factors in impacted your growth in QSP, I wondered if you could comment more broadly about the trends that you're seeing in growth or demand from customers between what maybe you call core models and disease models? Say smoothing out for any company specific factors. I'm trying to understand kind of where is the underlying industry demand going?

[Will Frederick:]

That demand is still strong for third party assistance to internal modeling and service organizations. It ebbs and flows of debt, I think it was more impacted by COVID than the software side of our business. As, all hands on deck, turn our attention to COVID related programs and hesitancy or slowness in terms of other programs and a push off therefore, of some services that were being utilized on a third party basis like that, which we provided some plus. The growth on services as over, two, three year window, been as high as 40% growth as low as relatively flat, I think the sort of consistent, ongoing normalized growth rate will be, in that 25% range. That being said, we'd all like guest services to be nice recurring and non-lumpy business but the base nature it is so even with sort of target 25% or expectation 25%. It allows them as ebbs and flows on a quarter-to-quarter basis.

[David Windley:]

Got it and so just to clarify, so in your case, QSP is all services or you also selling software, I guess what I'm trying to get at is the difference in demand between what might be thought of as core non-disease modeling versus disease specific modeling and if the industry is kind of rotating to getting more specific on disease states.

[Shawn O'Connor:]

Fair question that, the whole quantitative mechanistic modeling, QSP, QST space is been a high demand area and continues to be very active pipeline on our part, it also tends to be larger models, your basic PKPD study, which may land in 100, 200,000 range, the mechanistic model is going to be 500,000 could be a million and therefore, activities very good. But that leads to sort of the ebb and flow and ups and downs lumpiness of that business. PKPD demand is continues to be very strong, mechanistic modeling demand continues to be very strong as well.

[David Windley:]

Got it. Okay. In terms of moving on to a separate topic, in terms of your M&A comments, it sounds like you're still very active in your evaluation. How do clients or let me ask you differently, do clients desire for those capabilities that you bring in through acquisition to be natively integrated with your existing platform is that important or not to the client?

[Will Frederick:]

I think it can be important, it's not number one on their priority list. And I think the biggest driver in that regard can often be the siloed nature of the pharmaceutical organization. And so a tool and discovery, tool and clinical, the immediacy, the value to the discovery scientist. He doesn't necessarily latch on to the value of those two products are integrated. The client at a higher level in that organization will see those benefits and listed as something that is very valuable to them. But it depends on, where you're at, in the matrix with the client, and depends on what those add on, acquisition products or services might be in terms of who you're talking to that’s the client.

[David Windley:]

Okay, and last question for me, just to clarify. So I think the numbers you gave, of about 2.8 million of the growth of your 4 million in growth on a year-to-date basis would have been Lixoft 1.2 ish and 1.6 from the last question. Is that right? And then the remainder of the 1.2 would be your organic number that we should compare to the of 20 million in the first half of last year. Is that the right way to think about it?

[Shawn O'Connor:]

Sounds about right, yes.

[David Windley:]

Okay, great. Thanks.

[Shawn O'Connor:]

Very good.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Mr. Shawn O'Connor for closing comments.

[Shawn O'Connor:]

Very good. I appreciate everyone's interest and joining us here on the earnings call and look forward to next quarter and returning and telling you the story of Simulations Plus. Take care everyone.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.