Q2 2022 Simulations Plus Inc Earnings Call
Greetings and welcome to the simulations plus second quarter fiscal 2022 financial results Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce Brian . So you go from Hayden IR. Thank you Mr. Siegel you may begin.
Good afternoon, everyone welcome to our second quarter fiscal 2022 financial results Conference call.
Hosting the call today are stimulations by the CEO , Shawn O'connor and CFO Fredrik, an opportunity to ask questions about today's presentation.
Before beginning I would like to remind everyone that except for historical information. The matters discussed in this presentation are forward looking statements that involve a number of risks and uncertainties.
It's like believes expect anticipate mean that these are our best estimates as of this writing, but that there can be no assurances that expected or anticipated results or events.
We take place so our actual future results could differ significantly from those statements.
Factors that could cause or contribute to such differences include but are not limited to our ability to maintain our competitive advantages acceptance of new software and improved versions of our existing software by our customers. The general economics of the pharmaceutical industry, our ability to finance growth our ability to continue.
To attract and retain highly qualified technical staff, our ability to identify and close acquisitions on terms favorable to the company and its sustainable markets further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the U S Securities and Exchange Commission with that said I would like to turn the call over to.
Shawn O'connor Shawn.
Thank you Brian second.
Second quarter was another successful period for simulations plus revenue growth of 13% was in the upper half of our guidance range and we continue to make strategic and operational progress across both segments of our business.
We are well positioned to achieve our full year goals.
The 13% revenue growth was purely organic and surpassed the 11% organic growth rate in the last year's second quarter.
The primary growth driver remains our software business, which grew 25% year over year organically versus organic growth of 16% last year excluding.
Excluding the contribution of like soft this 9% improvement demonstrates how powerful that looks at the acquisition has been for the company.
Revenue from our service business declined 5% inline with expectations. The total backlog of our service business increased 50%, suggesting that service revenue will return to growth in the second half of fiscal 2022.
Strong operating leverage and the mix shift towards software drove 40% diluted EPS growth to 21 cents and.
And an adjusted EBITDA margin of 48%.
Moving to our software highlights gastro plus revenue increased 22% compared to 16% in the second quarter last year.
We signed three new commercial clients and had eight upsells in the quarter.
China, a relatively new market for us grew 34% off a small base validating our decision to engage additional distribution to this growth market.
I'd also note the gastro plus was referenced in 18 peer reviewed journals during this quarter supporting our progress in making simulations and modeling mainstream and drug development.
We also released membrane plus III dot O to drive advances or in vitro in vivo extrapolation for permeability skin penetration and release assay systems.
Once again.
Again monolithic suite revenue.
Send us to set the pace for our software segment.
Revenue increased 43% more than double the 20% growth rate last year, driven by strong renewals and Upsells, we signed eight new commercial clients and had 11 upsells during the quarter.
Additionally, our efforts to expand the addressable market geographically for monolithic suite includes a distribution in China, and Japan, starting to pay off.
Auto like Sweet proves provides users with a SaaS uncomplicated and powerful suite of applications for farmer cut metrics analysis in January we released an update that added a new module and a new model editor among other enhancements.
The overall result is improved performance for data libraries, and algorithms and we are confident in our ability to innovate and grow our technological advantages leading to further share gains.
Avnet predictor delivered 13% revenue growth in the quarter compared to 20% in the year ago period, we added seven new commercial customers and had eight upsells in the quarter.
We continue to advance our AI D D collaboration.
Turning to our services highlights.
PK PD services revenue declined 14%, while the backlog increased 18% in the quarter.
Year to date revenue declined 6% the.
The relatively high number of project disruptions that impacted the business during the second half of fiscal 2021 .
Tenuous to normalize we booked eight new projects or new customers.
From four new customers and from four continuing customers.
Demonstrating our strong demand and bolstering our confidence and a normalization of services revenue.
Given the cadence and moving from bookings to revenue we view bookings during the first part of the fiscal year as a key leading indicator of positive revenue growth in the second half of the fiscal year.
With improved bookings and a higher backlog, we're optimistic about the prospects for our PK PD services business overall.
Q S peak U S. P revenue declined 12% for the quarter, while backlog increased 78%.
Year to date revenue increased 4%.
This service segment is returning to pre COVID-19.
With a good mix of both efficacy and toxicology business and collaborations.
Last week, we announced that we secured a phase two S. P. A R NIH grant.
Further invalidate our biologics platform.
This platform is the quantitative system's toxicology software focused on complex macro molecule liver safety.
The grant provides approximately $1 $7 million for internal software development and wet lab work over two years through our partnership with the University of Pittsburgh Drug Discovery Institute.
The Institute will utilize a next generation organ on a chip system.
That compares liver toxicity in liver cells collected from healthy donors versus those with liver disease.
This allows for the screening for signals related to liver safety mechanisms and provides us data for biologics Sem stimulations.
In addition, we booked other important Q S P projects during the quarter.
<unk> will be a Q S. P model of uric acid and the propensity for therapeutic candidates to prevent Crystal for me formation, enjoins, which leads to pain and inflammation.
Compliment Sam will be a Q S. P model of the complement pathway to support evaluation of therapeutic targets and candidate compounds for diseases impacted by the complement pathway, which includes many inflammatory and nervous system disorders.
Our PV PK revenue was flat this quarter and backlog increased to 113%.
Year to date revenue increased 15%.
We are seeing increasing demand for P. B PK services as the use cases for P. B PK expand and exceed industry capacity leading to more outsourcing.
In January we announced two new funded collaborations.
We are partnering with a large pharmaceutical company to modify the gastro plus advanced compartmental absorption and transit model or a cat.
And supporting their support of ongoing research programs for the treatment of gastrointestinal diseases.
Second is with a large animal health company to both validate current animal P. B PK models and to add critical new species to the gastro plus platform.
As a reminder, funded collaborations is strategically important to US first it further solidifies our relationship with an existing customer.
Second it helps us reduce our R&D costs and ensure that our innovation is aligned with the customers' immediate needs.
Finally, we own the IP that comes from these collaborations and can use it with other customers as well.
This proven strategy as an important tool for ensuring Castro plus retains its industry leadership.
Overall.
Our services backlog increased 50% during the quarter.
Further evidence that the challenges and disruptions in the second half of last year are behind us as a result, we expect this business to return to growth in the second half of this fiscal year.
Our fiscal year to date performance gives us confidence in our guidance our software business continues to deliver accelerated growth rates that are driving strong profitability.
In addition, our services business is recovering and should contribute to consolidated growth in the second half of the fiscal year.
<unk>, we should exit fiscal 2022 at a pace that supports our longer term expectations for 15% or better organic growth with any acquisitions incremental to this number.
With respect to M&A, we continue to look for strategic opportunities to increase our total addressable market and accelerate our growth rates.
Let me now turn the call over to our CFO will fredrik to discuss the financial results.
Thank you Sean.
Our total revenue growth rate was 13% in the quarter.
The strong growth of 25% in our software business positively impacted our mix and software was 66% of total revenue this quarter.
Our services business declined 5%.
And they contributed 34% of total revenue.
Our total revenue growth rate was 14% year to date <unk>.
Software revenue growth was 23% and services revenue growth was 2%.
Software accounted for 63% of total revenue and services contributed 37%.
Our software gross margin was 92% for the quarter up from 89% last fiscal year due to increased revenue and slightly lower cost of revenue.
Our services margin was 59% down from 61% last fiscal year due to lower revenue and an increase in lower margin <unk> Qs T services projects.
Our total gross margin increased year over year to 81% as a result of the improving software revenue mix.
Our software gross margin was 91% year to date up from 88% last fiscal year due to increased revenue and slightly lower cost of revenue.
Our services margin was 60%.
One from 63% last fiscal year due to increased salaries and the increase in lower margin services projects, including training and workshops.
Our total gross margin increased slightly to 79% as a result of the improving software revenue mix.
We continue to enjoy a diverse mix of software revenue in the quarter with solid growth across our entire product portfolio.
Quarter, Gastro, plus was 56% of our software revenue.
Monolithic suite was 23%.
I've met predictor was 14%.
Their software was 7%.
Year to date Gastro plus was 55% of our software revenue model.
Monolithic suite was 22%.
I've met predictor was 17%.
And other software was 6%.
For the quarter, our software renewal rates for the commercial customers was 96% based on fees and 87% based on accounts.
As a reminder, our renewal rates fluctuate quarter to quarter due to customers, who either renew early in a quarter before their license term ends or late in the following quarter.
We saw an increase in our average revenue per customer this quarter compared to the prior year quarter.
This change reflects our normal price increases and ongoing upselling efforts offset by changes to our discount structure for multi year deals.
Year to date, our software renewal rate for commercial customers was 96% based on fees and 90% based on accounts.
New rates for commercial customers on average continue to be in line with historical rates in the mid nineties based on fees.
Average revenue per customer year to date was the same as the prior year period.
And we now have 124 University plus customers in 39 countries.
We believe this program, which offers free use of our software for students and educators will help prepare the next generation of scientists and contribute to the rapid development of safer lower cost treatments for patients worldwide.
Shifting to our services business our.
Our second quarter services revenue breakdown was as follows.
44% from PK PD services.
30% from Q S Peak U S T services 90.
19% from TV, PK services and 7% from other services.
Our year to date services revenue breakdown was as follows.
45% from PK PD services, 30% from Q U S Peak U S T services <unk>.
18% from PV, PK services and 7% from other services.
Regarding key service metrics total services projects increased 45% this quarter compared to the prior year quarter, and we ended the quarter with $17 million in backlog up $6 million from the prior year quarter.
Now turning to our consolidated income statement for the quarter.
Total R&D costs for the quarter were $1 $6 million or 11% of revenue.
Paired to $2 million or 16% of revenue last fiscal year.
R&D expenses were $9 million or 6% of revenue compared to $1 $3 million or 10% of revenue in the same period last year.
Capitalized R&D was <unk> $7 million or 5% of revenue compared to $7 million or 6% of revenue in the same period last year.
SG&A expense for the quarter was $5 $6 million or 38% of revenue compared to $5 $4 million or 42% of revenue last year.
The slight increase in expense was primarily due to increases in selling and marketing costs software license and maintenance costs and higher insurance costs.
Partially offset by decreases in compensation costs, and lower state and local taxes.
Income from operations was $5 $5 million, an increase of 57% and operating margin expanded to 37% from 27% last year.
Income tax expense was $1 $1 million for an effective tax rate of 20%.
Compared to income tax expense of $2 million and an effective tax rate of 6% last year.
Last year, we saw a lower effective tax rate, primarily driven by the tax benefits associated with disqualifying dispositions.
Net income increased 37% to $4 $4 million compared to $3 $2 million last year.
And diluted earnings per share increased 40% to 21 cents compared to 15 cents.
Adjusted EBITDA and adjusted EBITDA margin was seven $2 million or 48% compared to $5 million or 38% last year.
As a reminder, adjusted EBITDA is calculated by adding back stock based compensation expense and when applicable any expenses related to M&A or other non cash non operating expenses.
We provide a reconciliation of this non-GAAP metric to net income the relevant GAAP metrics in our earnings release as well as on our website.
For our year to date income statements.
R&D costs year to date were $3 $3 million or 12% of revenue compared to $3 $5 million or 15% of revenue last fiscal year.
R&D expenses were $1 $8 million or 7% of revenue compared to $2 $1 million or 9% of revenue in the same period last year.
Capitalized R&D was $1 $5 million or 6% of revenue compared to $1 $4 million also 6% of revenue in the same period last year.
SG&A expense year to date was $10 $6 million or 39% of revenue compared to $9 $9 million or 41% of revenue last year.
The expense increase was primarily due to increases in selling and marketing costs software license and maintenance costs and higher insurance costs offset by decreases in compensation costs and lower state and local taxes.
Income from operations was $9 $3 million, an increase of 42% and operating margin expanded to 34% from 27% last year.
Income tax expense was $2 million for an effective tax rate of 21% compared.
Compared to income tax expense of <unk> $7 million.
<unk> tax rate of 11% last year.
As mentioned last year, we saw a lower effective tax rate, primarily driven by the tax benefits associated with disqualifying dispositions.
Net income increased 31% to $7 $4 million compared to $5 $7 million last year and diluted earnings per share increased 33% to 36.
Compared to 27 cents.
Adjusted EBITDA and adjusted EBITDA margin was $12 $4 million or 46% compared to $9 $3 million or 39% last year.
This quarter, we continued to strengthen our balance sheet with cash and short term investments of $124 $6 million and no debt.
As a result, we are well capitalized with sufficient cash to support our continued expansion through internal investment and potential M&A activity.
I'll now turn the call back to you Sean.
Yeah.
Thank you will.
In conclusion, the first half of fiscal 2022.
US confidence that our business remains on a positive trajectory and that we are well positioned to achieve our full year outlook. Overall, we are targeting continued organic growth with the balance sheet that supports M&A when we find the right candidates.
With that I'll be happy to take your questions operator.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
And our first question comes from the line of Francois Brisbois with Oppenheimer. Please proceed with your question.
Hi, Thanks for taking the questions.
Congrats on the quarter just my first question here. This quarter ended February . So I was just wondering I think a lot of people are.
Wondering about the pandemic impact last quarter you had ended in November . So we you know omicron hadn't really hit yet. So if you can just maybe characterize it seems like there hasn't been much but do you think maybe some of the.
Downturn, which seems to go in the right way on the services side could have anything to do or just any impact at all for a moment.
Yeah, Frank Thanks for the question.
The impact if anything was not very dramatic are in total compared to where we were in the latter part of last fiscal year, the number of delays and cancellations.
Has gone back to kind of the normal level of a couple of three of those happening every quarter that we need to respond to versus where we were.
Six months out a year ago at at night in that third quarter of last year. So relatively speaking the impact of omni grown versus.
Previous variance.
It was much less and.
Certainly at the level of business activity with our clients the uptick in terms of the bookings in the quarter that led to the significant increase in terms of the backlog that we finished the quarter with the business operations of our clients and herself. Obviously, we're not we're not as impacted.
Dramatically at all maybe there is there still some churn in terms of clinical trials and some impact in terms of.
Data flow ability to commence projects, but nothing of the very dramatic.
Okay, great and on the software side.
Strong quarter. The addition of the 18 new customers can you just.
You've touched on it a little bit I think there's three gastro plus eight monolithic suite, but is this something that surprised you as this expected or.
Where did those customers come from.
Well they come from.
Stepped up process in terms of ER visits development activities.
Both internal and through our distributor network.
The industry is coming back to work.
Employees are moving.
They're adding new scientists into their organization, all of which drives our new license opportunity for us and so.
Our activities are in terms of the investments in business development are continuing to pay off.
And dramatically as well in terms of up sells.
The new customers.
Activity is good the upsell with our larger portfolio of products with the introduction of our Blix off is really kicking in.
40% growth with the model X product is something.
We're very proud of I can't say that we've necessarily targeted at 40.
And we're just seeing the benefit.
Bad product displacing a competitor in the marketplace and taking both new customers, bringing on new customers and as well taking a business.
Business away from the installed base with a competitive product the upsell of the program.
For model X.
The typical sales process. There is a customer it takes a small set of license and its first bite and get familiar with the product and the fact that when they come back to renew they are almost every time taking more licenses.
Spread them through and displace the competitive product in there and their organizations speaks well.
So that new customers this quarter for model.
Model X.
A year from now we'll likely that'd be great upsell lead for us to work in terms of increasing the revenue for that client specifically so yes software is certainly performing very well here across the board across our free most.
Most significant.
Platforms are the other category is growing as well that other category, primarily being the license of our <unk>.
U S peak U S T models.
Which are operated on a lower level simply because there aren't that many clients that have the in house capability of operating those models. So we're seeing contribution from that the other segment of our soft coolers as well.
Okay, Great and just maybe lastly, a.
The small decline, but that 5% decline with the increase in backlog and everything kind of normalizing.
Can you just help us understand where why that 5% decline.
Yeah. The biggest biggest impact there is that are you know a booking of new contracts that we get are typically is tight.
Timed for work effort project performance, maybe three to six months out sometimes longer.
Yes, we occasionally get a deal that is a response immediate response to an FDA inquiry.
Clients that we will sign and get started on very quickly, but more often than not it is.
For work, that's going to be performed to three to six months or more out there and so while we are while we picked up the bookings in the last two quarters here. The first two quarters of the year. Most of that work is out towards the back half of the year and our trough in the third and fourth quarter of last year, where bookings were.
We're low.
That tenant translates to now six months later or.
Or at least the last three to six months we're back.
That gap in terms of new business and backlog was declining that affects revenue six months later and we're in that period, so a 5% decline.
Isn't dramatically different than our expectations and we expect that the benefit of our uptick in terms of bookings and backlog to end.
Taxes in the back half of the year back half of the fiscal year.
Okay, great. Thank you.
Okay.
And again as a quick reminder, if anyone has any questions. You May press star one on your telephone keypad to join the queue.
Our next question comes from the line of Matt Hewitt with Craig Hallum Capital Group. Please proceed with your question.
This is Lucas on for Matt Hewitt.
I guess, our first question is you know you've received some government grants recently can you give us a sense what the cadence of the revenue from those will look like.
Yeah several.
Grants collaborations with some commercial clients as well.
Biggest one the one we just announced recently.
The grants in support of <unk>.
The PSP platform.
<unk> T platform biologics.
The $1 7 million grants.
It will.
Be performed over about a two year window of time.
It is not perfectly linear SaaS work is performed and milestones are achieved.
But you know more or less over the next two years that will contribute to revenue.
The other ones.
And there's usually a longer term one or actually normal for an NIH grant.
Collaborations with commercial clients, the FDA grants or FDA collaborations I believe.
And then Bruce.
Recent.
More typically be.
<unk>.
Two to three maybe four quarters.
Thank you that's helpful. And then geographically are there any markets, where you had been selling through a distributor, but you're now going direct.
No no changes.
That nature Lucas.
Over the last six months or so we've added and then distributor in China supported the model X.
The product line, we've added a new distributor.
South America or gastro plus.
Victor.
So we've added a couple of new distributors are we are.
I'm in the process of.
Viewing those relationships not that we have any underperformers, but.
We believe that we can improve.
The revenue flow from those geographies by supporting those distributors.
And a little different way.
So it's an area of focus for us but.
No no no issues just the opportunity we think that sits there that we can go after.
Thank you very much that's all I had.
And there are no further questions at this time I would like to turn the floor back over to Mr. Sean O'connor for closing remarks.
Yes.
Very good well I appreciate everyone's attention on our announcements today I feel very confident in terms of.
The position we're in to fulfill our expectation the guidance and our business expectations for the back half of the fiscal year.
Thanks for attending and look forward to updating you again soon.
Karen.
And this concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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