Q3 2020 Simulations Plus Inc Earnings Call
The Webinars will begin shortly please remain on the line.
So broadcast is now starting all attendees are in listen only mode.
Good afternoon, everyone on behalf of simulations plus I welcome you to our third quarter fiscal year 2020 financial results conference call and Webinars hosting the call today simulations plus the CEO, Sean O'connor and the company's CFO John Kneisel.
And how do you need to ask questions. All today's presentation. You may send your written questions using the question pain under control panel or you may use the hand rising icon under control panel to ask your questions directly please be sure to into your unique audio pen displayed when he joined the call.
Before beginning I'd like to remind everyone that with the exception of historical information. The matters discussed in this presentation are forward looking statements involve a number of risk and uncertainties. The actual results of the company could differ significantly from those statements factors that can cause or contribute such differences include but are not limited to continued demand for the company's products and compare.
The factors the company's ability to plans future growth.
Visibility to produce and market new products in a timely fashion the company's ability to continue to attract retain skilled personnel and the company's ability to sustain or improve the current levels of productivity further information on the company's risk factors is contained in the company's quarterly and annual reports and filings Securities Exchange Commission with that said I could turn the call ever to see.
Well, John Connor Sean.
Thank you gentlemen.
This was an excellent quarter presuming relations plus despite challenging economic conditions, resulting from an over 19 and down.
Fortunately the Pandemics impact to our company has been relatively minimal and in the third quarter fiscal year 2020, we delivered another strong quarter results.
We stated goal of delivering organic revenue growth of 15% to 20% and way again exceeded that goal with 24% revenue growth and total 18% organic revenue growth.
This was our fourth consecutive quarter with total revenue growth in excess of 20%.
Our software revenues represented 56% of our total revenue and grew 18% to 6.8 million, while our service revenue represented 44% of total revenue and grew 32% year over year to 5.5 million.
Notably each of our operating divisions delivered double digit revenue growth ranging from 12% to 39%.
Our gross margin improved to 78% overall software gross margin was 90% in this day seasonally high revenue grew quarter.
Service gross margin rose to 63 reasons in the quarter driven by excellent performance by oncology Division.
Excluding the effect of onetime transaction expenses of $1.1 million from our acquisition links allowed our profitability metrics in the third quarter all showed improvement.
As DNA expense was 32% inline with our expectations of 35% for the year.
Net income before taxes as a percentage of revenue was 40%.
Earnings per share excluding the impact of acquisition expenses was 20 cents up 25% over last year.
And finally EBITDA as a percentage of revenue was 46% again, excluding the onetime acquisition expenses.
This was an excellent quarter for the company.
Namely the impact of the covered pandemic on a serious simulations plus has been relatively minimal.
From an operations perspective, we successfully transitioned our workforce to a remote model for most of the quarter with a small group beginning to return to work on a voluntary basis in June.
Fortunately prior to the start of our stay at home orders, we've already had approximately 40% of our workforce working remotely and nearly everyone was equipped with the tools to make the transition from office to own rather seamlessly.
As a result, there was minimal internal disruption to our business and productivity remains high.
I anticipate the ruble workforce presented will remain high on an ongoing basis under the future. Our workforce is highly engaged in the support of our clients and the pursuit of new business.
We are advantage with a portfolio of business that is largely insulated from the market cycles in shock such as the Colin paying them.
A high percentage of our revenues approximately 85% of our software revenue and 47% of total company revenue this quarter.
Was derived from software renewals, which have experienced no impact to date.
Our service business operates up a large backlog.
As we continually review and validate our backlog at the end of the third fiscal quarter was more than $12 million, representing more than three quarters worth of average service revenue into the future.
His point in time, we anticipate any impact to our backlog currently Colin buyers will be less than 10%.
Just as important our strong balance sheet and cash position or more than adequate to support the final the ongoing operations of our business initiatives for growth and track record of consistent quarterly dividends. We ended the quarter with more than 7 million in gas and added an additional 3.5 million dollar credit facility as of that.
Excellent.
Credit facility remains undrawn.
That is not to say that we have not seen some impact during these difficult times as previously communicated securing new business has been impacted as the pandemic has disrupted our clients decision, making in spending activities for most of the third quarter, we experienced slowdown in new business closures.
In terms of new software licenses, especially in Asia, and New service business.
Ill.
Regeneration virtual meetings in presentations are continuing in both our software and services businesses.
With a cancellation of most industry conferences, we have been able to conduct trainings and workshops virtually nm successfully transition sale activities from face to face to virtual meetings.
As a result, our pipeline of that and new business opportunities is growing.
And exiting the fiscal third quarter at the end of May we began to see an increase in new business closures for new software license agreements and consulting contracts.
It's too early to assess whether the trend is changed but I am cautiously optimistic at this time.
Finally in addition to having model X from West soft and our sales offerings. We've introduced two new service offerings and initiated bookings in the last quarter.
The two new service offerings or strategy, plus which provide regulatory guidance to our clients and our government program, which feeds consulting assistance to any organization involved in front of Iris research.
Those are generating new opportunities in bookings.
Let me now turn to a brief comments are too specific gauge today.
And our Lancaster Division.
Revenue was up 12% to $6.7 million for the quarter.
Breaking this down 79% Atlantic has to revenue is derived from renewals, 10% from new sales and 11, 11% from consulting services.
And our software business renewal rates remained high at 88% on an account basis and 94% on a fee basis.
New licensing units grew by 10% year over year.
Our new regulatory services offering generated approximately $250000 in bookings during the third quarter.
And we added 11, new commercial companies, including new licenses and the US Europe, Japan, and Brazil also expanding our presence with nonprofits research groups academic institutions and regulatory agencies.
We are engaged in Lancaster in projects with 28 companies and seven funded elaborations.
We ended the quarter with 45 full time employees that are Lancaster Division.
One from 44 in the prior quarter and up four from 41 last year.
And our Buffalo Division revenue was up 20% to $3 million for the quarter.
Just as important we made significant improvement in our gross margin, which increased to 56% of revenue up from 52% in a year ago quarter as the division focused on internal project process efficiencies.
We signed 33 contracts and initiated 18, new projects during the quarter. Overall, we have 64 active projects across 31 companies and 28 proposals outstanding with 24 different companies as of July efforts.
We ended the third quarter with 45 full time employees that are Buffalo Division down seven grew 52 in the prior quarter and level with 45 last year.
These comparisons are impacted by a reduction implemented in software development staff no longer required to support project work efforts the underlying growth of consulting staff is 41% year over year.
Our daily some revenue increased 39% for the quarter to 1.9 million.
Breaking this down revenue related to doing some software and service projects represented approximately 55% of the total.
Radisson model services represented 5% idea model services represented 22% and Rina. Some grant service revenues represented 10% filing the heart failure model contributed.
Revenues.
Totaling about 8%.
Billington has 13 active consulting projects and seven active consortium contracts at this time.
We ended the quarter with 21 full time employees at RGB Division up three from 18 in the prior quarter and therefore from 17 last year.
During the quarter, we completed our acquisition Alexa the developer of the highly regarded modeling suite a modeling platform that covers a wide range of data types and statistical features for population PGT modeling that is widely used by academia pharma and regulatory agencies.
This acquisition immediately expanded our presence in Europe, and rebalanced, our mix and software and consulting revenues with a shift weighted more towards software license.
Lets up contributed two months of performance to our results in the third quarter totaling about 600000 revenue, which represents a 15% growth over their revenues in the same period last year, well independent operating independently.
The customer counters 50 to a 23% increase over last year and their software renewal rates are 84% on fees and 90% on accounts.
Post acquisition integration efforts are going well. These efforts are focused in four primary areas first the integration of monoliths into existing direct and distributor sales processes.
Second the evaluation of integrated software product development plans.
And thirdly initiation of modeling space consulting service offerings and the training of our consulting staff on the platform.
Finally, the integration of the links up organization under the company's business processes and infrastructure where appropriate.
I'm pleased to report that well just that their beginnings progress is being made across all these injections.
I'll now turn the goal over to John to review the detailed financial results John.
Thank you Shawn and good afternoon, everyone.
So on indicated this was an excellent quarter simulations plus our consolidated net revenues for the third quarter of our fiscal year 2020 were up 23.8% or 2.4 million to 12.3 million from just under 10 million the prior year.
Third quarter represents the fourth consecutive quarter revenue growth greater than 20%.
On an organic basis, which includes ILEC software, which excludes there luxoft acquisition, our revenue grew 18% organic revenue remains.
Steady in the high teens, despite challenging economic conditions triggered by covert 19, the general sectors. We operate in software and life science pharmaceutical has tended to maintain momentum in the midst of dependable.
Consolidated software and software related sales increased.
1.3 million or 17.7% over the prior year quarter LSA software sales accounted for $566000 or 55% of this increase consolidating consolidated.
And analytical study revenues.
Increased 1.33 million or 32.4% over the third quarter of 19.
Cost of revenues increased 14.7% or $341000, resulting from increases in labor related costs and direct expenses on contracts.
We saw a decrease in travel and travel related expenses of $154000 as training as well on line due to travel restrictions.
Additions this quarter, we recorded a benefit for royalties of $189000 as the world's the agreement reached the final determinations and amount sweeter crude will recognize back into income.
Total gross profit increased 26.5% to 9.6 million, representing a 78.3% gross margin in the third quarter fiscal year.
Historically, our highest quarter.
Finally, compared to 76.6% gross margin in the same quarter last year.
Overall software margins were 90% and consulting margins were 63%.
Okay.
DNA expenses, including the one time M&A charges associated with will exhaust acquisition.
Over $1.1 million in the quarter were $5 million for 41% of revenue for the third quarter of the year, an increase of approximately 1.9 million or 62%.
Fair to the prior year.
The increases in SGN, a expenses was primarily result of increase in selling expenses and commissions increases and the salaries and wages and labor related benefits as well as contract labor for outsourced services.
Supportive company growth.
195000 of the increase came from our new subsidiary during the two months since acquisition and as I indicated earlier we.
For approximately 1.1 million of acquisition related costs.
Quarter for legal accounting due diligence and M&A banker related fees.
Without M&A transaction related costs as of June a would've been approximately 32% unraveling.
And we don't expect any substantive additional M&A transaction related expenses in the fiscal fourth quarter, nor do we first foresee any material amounts of integration cost side.
Research and development expenses for the third quarter were approximately 1.36 million of this totaled 53000 was expense and 606000 was capitalized.
Compares to approximately.
All in all seven prior year in spend.
And where does that point $643000 was expensed and 422000 was capitalized.
Income from operations was $3.9 million for both the third quarter.
Fiscal years 2020 and night in 2019.
Being flat year over year on higher revenue, primarily affected by the one time M&A related expense of our acquisition of Luxoft.
Our provision for income taxes in the third quarter of the year was 844000 with an effective tax rate of 22.3% compared to an effective rate of 25% in the prior year.
The rate is lower this period, mainly due to the effect of stock compensation related deductions.
We expect our tax rate to end up in the 20% to 25% range for this fiscal year.
Net income increased to one.
0.6% or approximately 47000 2.9 million in the third quarter of this year compared to 2.9 million in the prior year.
On a per share basis that income was 16 cents per diluted share.
In both this fiscal year and last year.
ILEC Foster related transaction lowered diluted earnings per share by approximately four cents per share.
EBITDA was 4.6 million third quarter or the fiscal years this fiscal year last year.
Now.
Turning to the next line.
Is the nine month nine last year to date comparisons.
Consolidated net revenues year to date were up 23.5% or 6.1 million to $32 million compared to say 25.9 million a year ago.
Our gross margins for the first line loss in fiscal 2020 was 75.1 compared to 74% in a year ago quarter a year ago.
Areas and improvement of 110 basis points as DNA expenses, including 1.4 million onetime M&A transaction.
Related costs were 12.6 million or 39.4% of revenue for the first line losses fiscal year 2020, compared to 8.6 or 33.2% of revenues for the same period last year.
Research and development expenses were 3.8 million for the first line loans up about 500000 from 3.3 prior year.
The expense portion increased $130000 to 2.03 million.
Year to date R&D expense as a 6.3% of revenue down from 7.3 versus in the prior year.
Income from operations for the first line lung so fiscal 2020 was 9.4 million compared to 8.7 million.
Net income increased by approximately 620008 or 9.5% to 7.1 million.
Diluted earnings for.
Share was 39 cents per share compared to 36 for the same period last year.
The software related.
The luxoft related transactions lowered EPS by approximately six cents per share year to date.
EBITDA was 11.5 million.
Year to date of 7% from prior year.
Turning to some grass others graph shows consolidated quarterly revenues.
The third quarter reach fiscal years typically our strongest followed by a decrease in revenue in the fourth quarter that coincides with the slowdown in our clients purchasing in the summer months.
Once again the first.
Third quarter is on fiscal 2020 fold the same upward trend.
The next slide presents operating income by quarter.
Illustrating a consistent track record of increases both year over year and sequentially. During the first one third quarter's fourth quarter and lighter for the year.
As you can see the patterns for quarterly revenues in quarterly income from operations largely held.
True for quite a number of years this quarter, we were flat compared to last year.
Again, the result of 1.1 million of non recurring and non operational costs related to the will exhaust acquisition.
Next slide.
Consolidated net income by quarter, we can see that similar pattern income and third quarter typically being the strongest.
The graph isolates the impact over $1.5 million deferred tax benefit.
In the second quarter fiscal year 18, so is it tends to skew the presentation with our highlighting that difference and again this quarter, we were flat compared to last year. The results for the cost of the Luxoft acquisition.
On the next slide diluted earnings per share while same pattern.
Absolutely that is going as expected.
As I mentioned earlier fiscal year, 2023rd quarter diluted earnings per share were 16 cents and included M&A transaction costs for Luxoft, excluding those nonrecurring expenses earnings per share would've been approximately.
Four cents more.
Turning to EBITDA in the next slide.
Again the patterns.
Hold for even though with the overall trends moving upwards into the right typical seasonality.
Hey exists between the quarters.
Mentioned, one thing about the trends in our fiscal performance like so many we are unable to truly predict on possible featuring.
Of course with 19 with any degree or certainly our based on our current lows ability. We expect the seasonal nature of our revenue in from an EPS to continue in the coming quarters based on an annual software revenue renewal model unfolding backlog in our pipeline of new business opportunities.
This slide shows our revenue by region on a year to date basis, we sold globally with the majority of our revenue in the Western Hemisphere, approximately 69% of revenues were in the Americas year to date, this year or Europe, representing 16% in Asia.
10% half of which.
Sales were derived from sales in Japan.
On the next slide.
We will strengthen our strength of our cash position with a quarterly view of our cash balance and how reviews funds for investing through acquisitions and returns to shareholders in the form of cash dividends.
The Red Lion indicates lower point of care.
There are times, when we have invested in acquisitions.
The Green bar represents cash used for acquisitions was 6 million net cash paid in the most recent quarter of our for acquisition of works lost.
Cash flows from operations have allowed us to invest for future growth through acquisitions, while maintaining healthy balance sheet.
After each acquisition.
Can see a pattern of cash accumulation.
Beginning with the first quarter of 17 on the far left the blue bars the bottom.
Sorry to consistent dividend payout was approximately 900000 per fiscal year through fiscal year 17, and then beginning of 18 or increase the dividend payment to six a share, thereby returning and millions of million, one and cash to our shareholders quarterly through the present core.
Today in our press release will again announced the board of directors as voted to continue the six cents quarterly dividend. The next dividend payment will be our August threerd.
Our reinvestment through acquisitions has exceeded 16 million over the last four to five fiscal years.
We have also returned more than 15 million to our shareholders through consistent dividend payouts without the use of any borrowed.
During third quarter as Sean mentioned.
Before we established a three and a half million dollar line of credit with the commercial bank under the terms the LLC drawn amounts and current interest a crime rate or at a fixed rate based on LIBOR, plus 175 basis points.
To your agreement and there are no charges for Undrawn line themselves.
At the end of our third quarter with nothing drawn under the facility and do not anticipate and need to access line in the near future over it does provide us with access to liquidity should the need arise.
During the next slide you will the balance sheet metrics at the end of the quarter cash was a 7.4 million, which was down 35 to present compared to the last fiscal year, primarily the result of cash used in the.
Acquisition of Luxoft.
Third ratios and liability changes.
Mainly the result of any acquisition liabilities books.
Our balance sheet remains strong with excess cash and zero borrowed.
With our continued cash flow generation in a prudent approach to allocating capital, we're well positioned to support our continued growth and protect our business during the economic cycles.
Sean I'll turn the call bacteria.
Thank you John.
Additionally, today, we filed an art and.
Shelf registration on form S. Three will the FCC.
The registration statement and perspectives and allow the company to register various securities, including common or preferred stock as long as warrants and or depository shares. We have now filed the specifics prospectus supplement to initiate an operating at this time whenever the shelf registration in place for use in the future and in support.
Working capital M&A and other general corporate purposes, our recent qualification under the well known seasoned issuer rules made this undertaking timely and efficient.
In conclusion, we are well positioned to continue our record a strong financial performance and encouraged by the prospects where in business. Despite the lingering unknowns related to the coding and then.
We are out of the gained strong with the integration of lifestyle and encouraged by opportunities that business that business opens up for us, particularly in Europe.
Demand for solutions remains strong, although we may experience delays and the timing of customer orders were confident any short term disruptions in the flow of new license orders will not impact the long term prospects for our business or the thesis for investing in simulations plus we expect double digit year over year revenue growth in the first.
Fourth quarter.
Despite the impact of seasonality on sequential basis.
With that I'd like to turn the call back to the operator, Cameron and take any questions that you might have.
Thank you John once again I'd like to ask a question isn't the telephone. Please use the handwritten icon on the control panel the share Q into the audio and as unique for each individual user. Please hold one second while we pull for the live questions.
And our first question comes from Matt you at the analyst with Craig Hallum.
Thank you for taking the questions and congratulations on the strong third quarter.
Thanks, Matt.
We are hanging in there.
I guess first off.
Could you maybe talk a little bit a new do you touched on this but I'm wondering if you could talk a little bit about the cadence that we know that there was a little bit of slowdown on new customer bookings in the quarter, but how is that cadence change I guess as the quarter progressed and where to things kind of sit now are you seeing a strong.
Longer uptrend, there or is it still some hesitancy.
Well, yes, I'd describe it this way this name and we went into the quarter, which is a reduction reducing our expectation in terms of the new licenses consulting contracts we saw that.
In the last month of our second quarter and went into the third quarter anticipating.
Relatively slow pace that slow pace.
Game changer reality and during the year or closure business was was well below where historically we've seen.
We did see as we entered the last month.
Order may.
The things picked up a little bit.
And the like that very very optimistically.
I just on something a trend change that we can hang our hat on just share.
And so we're constantly looking into the fourth quarter that we will remain impacted by.
A little bit slowdown as we look at our customers across the board.
Right, but the endemic response in general.
Equal started to come back in activity started.
And maybe has taken a little back as infection rates et cetera.
After the use of.
I want to be optimistic and we certainly did better than we anticipated on reduced expectations in may the last month third quarter.
And.
I'd like to say.
The uptake nutrient forward.
But I don't think it's begun data points to whereas yet to say things have turned in the marketplace for us will remain cautious as we go into the fourth quarter.
Understood. Okay, and then I guess kind of moving down the income statement gross margin that was your high watermark going back to all the way to our Q3 of 2017.
How sustainable and I appreciate some of the seasonality, but how sustainable is this.
Gross margin given some of the changes in.
You know working from home and kind of the mix, adding luxoft with the higher software margin, but how should we thinking about gross margin.
Yes, I don't seem that anything to significant has happened in there other than a recent improved margins out of the cognizant consulting operations, where weve thousand efficiencies through the started to implement them and they're very good quarter again, the third quarter is our highest revenue.
After the seasonality perspective, and so we benefit.
As we have to.
The expenses on more or less a linear basis through the year our peak revenue is.
Yes, good arise during the third quarter, and then as the seasonality dictates will step down in the fourth quarter and you'll see the pattern.
Annual basis is pretty consistent.
Gross margin will be impacted.
In the fourth quarter, So I'd point, you to the year over year.
Gross revenue results to little bit improved over last year, if you will.
So we're seeing some improvements there obviously like.
Coming into the mix as.
More software gross margin software to or mix takes our overall revenue back to more closely with 50 540.
Split between the two sources of revenue there certainly has helped gross margins as well.
So.
A little bit improvement on the Arctic.
As you as you model, we look forward to keep in mind.
Theres seasonality.
Factor in player.
Got it alright, maybe one more and then I'll hop back into queue.
Given the strong performance that you've been putting up and the balance sheet.
Profitability is there.
Have you had any discussions internally with the board.
Regarding maybe taking on a little bit of risk with some of your customers animal or what am I guess asking is is there any chance you could start to look at some of your customers and say you know instead of charging you X., we would be interested and essentially partnering with you or we're going to collect milestones and royalties.
As youre.
Pipeline opportunities are successful is that has that.
Discussion come up in and what are your thoughts on that type of a model.
As it may change.
In terms of.
Our model today being a traditional mix of the software and consulting revenues was always focused on returning.
Very good profitability metrics.
On a quarterly basis, a change to a royalty and milestone.
Adding on the future.
We will impact that tremendously so that would be.
Again changes in our approach.
We certainly do look at situations where annually.
And your services in different forms of service offerings.
That.
May lead us into areas, where we're looking at.
Delivering is holding results that are the clients it helps them today.
Doesnt they offer them to the into one of the route longer term down the road.
Which might progress seasons of the discussion.
We're not close to making any of those sort of changes in our business model as one time, you feel comfortable that we're able to deliver a good value our clients.
Hi, good return to two persons shareholders in their current model today.
Fair enough alright, thank you.
Thank you, Matt and our next question is from Kevin Gate.
Bill scanner, Kevin Your line is now a lot.
Hi, good afternoon, and congratulations on strong quarter.
I just wanted to bring up the shelf registration.
It seems like some commentary ill discuss the timeliness of.
Being able to.
Yes.
Yes become a serial issuer.
Is that timely in sense that you are looking to engage more M&A.
And if you do sell are you looking to use anything other than accumulated cash in your balance sheet. Thank you very much.
Sure sure, Yes, certainly it's something shelf registration is something that we've looked at or sometime during considered to be appropriate for a company and our science shape in India and whatnot.
Achieving the.
We see stressful.
A month ago, but as a position where eases filing that a registration statement was facilitated mentally new review period.
Being a big piece of it.
Benefits as well.
In terms of the its potential use dozens of future. It doesn't change your approach in terms of modeling namal and merger and acquisition activity.
It's an ongoing effort on our.
We closely.
Months ago.
The third acquisition the company's me.
As I said before.
And every three or basis and I hope it that.
Windows shortened it Regal to move identify and action on.
Appropriate to target candidates.
Quicker pace here.
The short there a there it will allow us some needs and speed in terms of responding.
On the nature of those transactions.
And the need for.
Shares.
Our cash to lets move on those.
Hey, good acquisition already and as we've done or the other acquisitions funded out of existing resources existing capital.
And this might give us an opportunity.
We look at the target opportunities that are larger than that.
So if that answers your question.
Yes, that's very helpful and maybe if you can discuss briefly the valuation out assuming the targets at year end, even looking at.
It is the opportunity set our 10 year expected range, perhaps some intriguing and then lastly, you had brought you had put out a PR about.
Partnering with co than our research organization has there been any product wins related to cover 19.
In our anti viral is or vaccines.
Simulation cost.
In terms of the.
M&A target list them into values ramp from small to large large for intertwined.
Historically as to where we met an appetite to income VITAS the three previous transactions.
Overall, and sort of $20 million and below size.
As I said the.
Target list, if you will might expand in terms of its valuation size as early as we go forward.
With regard to the comment efforts out there yet it's been a fast and furious market. We tend to be include citizen and in many ways contribute some of our knowledge or past experience and in model efforts to date.
On an organic granted spaces and some scenarios.
Counting on the fact that they would translate to commercial opportunities going forward.
We have some small realities in that regard and we've got a pipeline of discussions and Graham proposals and the number number of opportunities in and process and the pipeline going forward.
Great. Thank you so much.
Thank you once again, we'd like to ask Allied question, please or the hand, radiant icon, what's unique audio pen and while we pull for additional questions I will go through some of the questions that have been sent in.
The first question is from Howard Halpern Taglich brothers.
First question is what will drive improvements.
In potential gross and operating margins over the next 12 months.
Well, obviously, the two biggest impacts on pandas presented results operating expenses in gross gross margin are.
Our overall revenue growth.
[music].
As we get larger there are certain fixed expenses that.
Don't rise with the revenue growth, we will see a little business improvement there.
The other big impact is the mix of our software and consulting revenues.
Consulting opportunities consulting revenue continues to grow at a 30% plus.
Plus.
Ranges.
And software in the 15% level and so we have a continual mix change that takes place.
Two key path.
In the favored software.
Through internal development of products and driving is our existing portfolios software products.
Revenue growth at a faster pace.
And then obviously as reflects our add to the softer side of our business through the through acquisitions going forward.
Thank you John next question Howard is over the next 12 months what are the gross prospects for the European subsidiary.
Lets us as the.
Very consistently growing the last couple three years.
The 30% topline growth rate.
They've enjoyed a little bit.
Ruled small numbers there as they find their way too early three to 4 million dollar annual level.
The revenue.
We.
We are pleased with the results in the first couple of months here, we only get to a partial quarter.
And as they come onboard.
We're seeing the same impacts that.
And that our existing software business.
Has encountered as a result.
Okay.
Situations so.
Their growth rate to shoot here as part of the simulations plus family.
I would anticipate may come down from that 30% growth level that they've enjoyed.
For the last few years, but in the long runway certainly will grow.
In the.
15% to 20% the range that we've been.
Touting here in terms of our ability to grow on organic basis, they should fit well into that.
Might be able to contribute to the higher of cited that to depending on how quickly and when and how we come out of the.
Because of.
Scenario.
Net revenues are 100% software on acquisition, 99% I guess are there some small contribution on on the service side and Thats.
Thats, an outside and so in terms of looking at.
Europe in really globally.
Our ability to.
Take advantage of is holding business that has drawn to were tied to the model X suite to application presents an opportunity for contribution to revenues going forward as well.
So let me say exciting addition to the mix here.
After various started in the first couple three months since joining the team and to flip over to the same where we can do is it going going forward.
Thank you Sean the next question from Howard is on top of the $5 million five year key contract as Keeley and the offering made any inroads as the need for securities increasing during the drug development process.
I'd say of late.
Certainly, making big investments in acutely line data repositories decisions.
Impacted.
One way more significantly than analytical tools like Castro small analytics.
And those types of decisions that have them.
Shelves in terms of our clients out there in the marketplace.
No I think my response, there is no not seen any.
Any uptick in data.
Area or businesses on.
Great. Thank you final question is and how to happen is for modeling purposes, what is unlikely quarterly increase in DNA expense related to link salt acquisition.
DNA expense I presume is maybe a diverse SGN expense.
And just depreciation Andres.
[music].
Yes.
Yes.
Yes, the DNA level, certainly I'll respond.
Fair model fits and.
Right with ours, and so our expectation that.
We're going have operated operating on an annualized 35% SGN a level.
Exactly right into that.
Relatively small operation.
In his consolidation into our numbers no dramatic change there.
Thanks, Brian.
Where is more cash oriented in terms of EBITDA percentage.
Luxoft is in addition will contribute more significantly more positively on EBITDA us perspective, because their overall margins.
And even.
Given even better than that are pretty consolidation EBITDA percentages at Hudson plus so they will.
Contribute disproportionately in terms of increasing.
Cash flow in EBITDA.
Okay.
Okay.
Thank you John and we have a few written questions from Brett Desapio, but he is on the line lives. So we'll let them ask questions like first and then follow ups Danny the written questions that he's committed.
Brett.
Hello, Hello, Sir your line is low.
Great.
Hi, Brian Yes, your life. So up thank you for taking my question. The first question is what is your current marketing slash sales approach to distribution your software to other pharma companies chemical companies et cetera, and you have any plans to expand your proprietary software so that matters enterprise resource planning.
Space outside of pharma bio chemicals or more so manufacturing and other other markets and then the second question is Japan seems like a huge opportunity for you that is client or potential growth what is your sales and marketing marketing approach there.
Grow revenue.
Sure I'll walk through them.
Our current to sales processes.
Both direct and through distributors.
The distributor network is utilized in the Asian markets.
And the rest of the world is.
Direct sales effort.
Our.
Turning to like a second part of that first first question is in terms of expansion outside of the.
Pharma space not as far reaching is generic ERP spaces manufacturing.
We do.
Impact.
And can impact certain pharmaceutical manufacturing.
Decisions and in activities.
If your question is from the answer is sort of perspectives of applying our modeling in service to a.
A wider range of industries. The answer is no we'll stay focused in our.
Pharmaceuticals basin the.
Jason seats to it.
The Japanese market.
Is is yes, we are the larger.
The non North American markets, Europe, and Asia being the the two two big markets for Us outside North America.
Japan as I said, we use distributors there for our software products and on a consulting side.
We do some business in Japan, we too.
Our hair person engine business for Japan through their Japanese representation of companies here in.
North America, there subsidiaries and in North America.
The opportunity exists at some point in the future.
Seen other consulting organizations as our ill.
Season, the success when they have consultants on the ground in Japan will contribute anything to agree or capture market share in that regard and thats something that we certainly look at the in future.
Important trigger on doing something that nature at this time just yet.
Hopefully that answers on your questions.
Thank you John and we have one follow up question from Kevin Gate out on mute his line now.
Kevin your an ally.
Hi.
Thanks again for taking my follow up.
My question is just generally.
You can kind of speak to the resilience of the software modeling industry within the pharma space.
Maybe talk about the long term growth aspect, which it just seems like.
Yes, where you are immaterial creation spaces it generates perpetually growing.
So just perhaps talk too.
Any puts and takes two to what you have seen over the past several months is it looks to the future. Thank you.
Sure sure.
Yes, it's an exciting market for me from my perspective again, a very live involved for 20 years now.
Those early days of any our head on.
So that wallet.
At a large pharma company and trying to get the initial adoption that initiated.
On a long way from that point in time and today.
It certainly accepted a hand adopted and flourishing in terms of its expanded application.
Those along the timeline discovery to approval.
As well as.
Yes, the various.
Means through those between those two points in terms of impacting decisions.
Prioritizing molecules.
Affecting bio equivalents decisions.
Impacting FC a response to submissions.
It was goes on and.
We think aided overtime as well.
And by the available resources that are out there the number of scientists at this relatively weak mix.
The math statistics biology, chemistry et cetera.
That are able to.
Dry in the greater the software if you will.
We today.
Numerous academic.
Organizations producing at candidates that are articulating the field.
And allowing more resources in that regard that is supporting.
The growth and adoption in modeling and simulation in the pharma space.
I look at one of the silver linings of the coated in endemic here. If we can search for those things is the heightened awareness of the GXS takes too damn wanting to develop drug and that seems to be such a painful process. How can we improve that's in there.
Vessel modeling and simulation delivers to the to the industry.
So we're getting some attention is well reserves will be very impactful.
In terms of the efficiency and effectiveness.
Our development cycle.
And as I look out into the future I don't see any end too.
This expansion of application, a modeling and simulation in new and different ways as I can impact.
Our clients.
And.
I'm very excited about the future for modeling and simulation.
Okay.
Great. Thank you.
Well, Thank you Sean and this concludes the conference call today. Thank you everyone.
And you've missed any part of today's conference call. The replay will be available on our website www dot simulation dash plus dot com. Thank you and look forward to next earnings call do further dialogue. Thank you.
Thanks, everyone.
No.