Q3 2022 Simulations Plus Inc Earnings Call
Greetings and welcome to the simulations plus third quarter fiscal 2022 financial results Conference call. At this time, all participants are in a listen only mode a.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded it.
It is now my pleasure to introduce Brian Segal from Hayden IR. Thank you. Mr. Siegel you may now begin.
Good afternoon, everyone welcome to our third quarter fiscal 2022 fiscal results financial results Conference call.
With me today is our CEO , Shawn O'connor and CSL well Frederic after their portion of the call. We will open the floor for questions before.
Before we begin 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.
Words like believe expect and 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 will actually take place. So our actual future results could differ significantly from those statements factors day.
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.
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 a sustainable market.
Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the United States FCC.
That said I would like to turn the call over to Shawn O'connor Shawn.
Thank you Brian .
We had another strong quarter with growth across both our software and service businesses and encouraging underlying data supporting our long term view for sustainable top and bottom line growth.
The 17% revenue growth was purely organic our software business grew 16% year over year and accelerated growth rate compared to last year.
We experienced growth across all of our client segments, but saw improving penetration into smaller customer accounts.
As an indicator of deeper adoption of modeling and simulation throughout the industry.
In addition initiatives to grow our geographic presence and expand cross selling are benefiting our software business.
As I said last quarter, we expected our services backlog to support increased revenue growth during the second half of our fiscal year.
In this quarter, we experienced this with service revenue increasing 19% in the quarter.
We maintained strong operating leverage during the quarter generating significant profitability and free cash flow.
E. P. S grew to 20 cents per share and our adjusted EBITDA margin was 42%.
Moving to our third quarter software highlights.
Gastro plus revenue increased 19%.
Six new commercial clients and made 14 Upsells. Additionally, we saw good growth from Asia, Despite significant foreign currency exchange rate impacts.
I'd also note the gastro plus was referenced in 16 peer reviewed journals during the quarter supporting our progress in making simulation and modeling mainstream in drug development.
In April we announced a new funded collaboration with a large pharmaceutical company to expanded validate the mechanistic in vitro dissolution models using D D D plus software.
Recent enhancements to the tool I focused on improvements to in vitro analysis.
Through this new collaboration we will expand into the injectable product space and apply our novel approaches to capture dissolution kinetics within in vitro systems designed by our industry partner.
This funded collaboration is specific to D. D D plus but the results will benefit users and developers of gastro plus.
Monolithic suite revenue increased 8% for the quarter and is up 31% year to date.
Growth rates declined in the quarter due to the timing of renewals.
We signed 10, new commercial clients and the pattern of significant upsell upon renewal of existing customers continue.
We continue to believe that monolithic suite is taking market share in established markets and expanding its addressable market geographically in China and Japan.
As Matt predictor delivered 7% revenue growth in the quarter, but it's still up 14% year to date.
We added six new commercial customers and had nine upsells and this quarter.
We released version 10.4 that met in the quarter, allowing users to create three D chemical structures within the software to access property prediction models derived from our cutting edge three D descriptors.
Turning to services P. J P. D revenue increased 29% reversing trends recent trends and increasing our year to date growth in this area to 4%.
A good bookings result in the first half of the year contributed to a 69% year over year increase in the number of projects worked in the third quarter.
Encouraging trends include increased consultant utilization.
Normal volume of project disruptions and higher project pricing yields which contributed to margin expansion.
With improved bookings and a higher backlog, we are optimistic about the prospects for our PK P. D services business overall.
During the quarter looked soft and cognizant completed a newly funded project from the U S food and drug administration and the center for research on complex generics to establish the suit suitability of model integrated evidence to demonstrate bioequivalence for long acting.
<unk> and implantable drug products.
We proposed a novel delivery designed to alleviate bio equivalents trials lower power or long duration for long acting injectables.
The results were presented at F D a sponsored workshop.
This project was a great opportunity to leverage our scientists and developers across the organization to show the need and relevance of the population modeling approach for L. A I products and bio equivalents calculations.
U S peak U S. T revenue increased 1% for the quarter and has grown 4% year to date.
As you recall this segment saw significant bookings acceleration in Q2 that allows the U S. P. S. T team to commence planning and initiate many of these projects in Q3.
From these projects for more well more fully impact future quarters.
P. B PK revenue increased 83% this quarter and is now up 37% for the year and the number of projects is up 152%.
Performance reflects the deeper implementation of P. B PK modeling into new youth use cases, and an increase in the perceived value of these projects and the impact on drug development cycles.
Overall, our services backlog continued to grow increasing 34% during the quarter, providing further evidence that the challenges and disruptions in the second half of last year are behind us.
On the heels of our robust performance year to date heading into the fourth quarter. We are currently at the high end of our 10% to 15% revenue guidance for the full year.
Given that we are nearly halfway through the quarter, we're comfortable narrowing our guidance range to $52 million to $53 million or 12% to 15% growth.
Within these ranges, we expect software to be approximately 60% of total revenue.
Note that the fourth quarter is typically our seasonally slowest quarter.
On the software side, the seasonal impact is especially prominent for licks off where buying decisions are typically made early in our fiscal year.
Driving higher revenue growth rates in the first half of the year.
On the services side. It is common for projects to be pulled forward into our third quarter.
<unk> out of our fourth quarter into our fiscal first quarter.
This is due to our customers taking vacation time during the summer months, especially in Europe .
Concerning M&A, we continue to evaluate opportunities and where you're seeing some levels of valuation rationalization.
We will update you when there's something to announce.
Let me now turn the call to Wil to discuss the financial results.
Thank you Sean.
Total revenue growth rate was 17% in the quarter comprised of 16% software growth and 19% services growth.
Software represented 64% of revenue during the quarter, which continues to be above our 55% to 60% fiscal year guidance.
Our total revenue growth rate was 15% year to date with software growing 20% and services growing 8%.
Software accounted for 63% of total revenue and services contributed 37%.
Software gross margin was 92% for the quarter up from 90% last fiscal year due to higher revenue and leverage from the cost of revenue line.
Service margin was 66% up from 63% last fiscal year due to improved consultant utilization and an increase in higher margin services projects.
Total gross margin increased year over year to 83% due to the higher software mix.
Software gross margin was 92% year to date up from 89% last fiscal year.
Services margin was 62% essentially flat to last year.
Total gross margin increased slightly to 81% due to the higher software revenue mix.
For the quarter Gastro plus represented 67% of software revenue monolithic suite was 11%.
Admin predictor was 17% and other software was 6%.
Year to date Gastro plus represented 59% of our software revenue.
Model X suite was 18% and admit predictor was 17% and other software was 6%.
For the quarter, our renewal rate for commercial customers was 92% based on fees and 87% based on accounts.
As a reminder, our quarterly renewal rates fluctuate year to year when customers renew before their license term ends in the following quarter.
Or the following quarter after their license terms ends in the current quarter.
The decrease in the renewal rate based on fees. This quarter was also impacted by foreign currency exchange rates.
Average revenue per customer dipped slightly this quarter, but remains relatively in line with historical trends.
This reflects our normal price increases and ongoing upselling efforts offset by changes to our discount structure for multiyear deals.
Year to date, our renewal rate for commercial customers was 96% based on fees and 89% based on accounts, which continue to be in line with historical rates.
Average revenue per customer is down slightly year to date, but remains relatively in line with historical trends.
We also now have 190 University plus customers in 49 countries.
As previously mentioned this program offers free use of our software for students and educators to 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 third quarter services revenue breakdown was as follows.
47% from PK PD services.
One 3% from Q S. P. Qs T services, 25% from P. B PK services and 5% from other services.
Our year to date service revenue breakdown was as follows 46% from PK PD services.
27% from Q S Peak U S T services.
20% from P B PK services and 7% from other services.
Regarding key service metrics total service projects increased a robust 50% this quarter compared to last year and backlog increased by approximately $5 million from last year to $17 million.
Now turning to our consolidated income statement for the quarter.
Total R&D costs for the quarter were $1.4 million or 9% of revenue compared to $1.5 million or 12% of revenue last fiscal year.
R&D expenses were point $7 million or 4% of revenue compared to point $7 million or 5% of revenue in the same period last year.
Capitalized R&D was point $7 million or 5% of revenue compared to point $8 million or 7% of revenue in the same period last year.
SG&A expense for the quarter was $6.8 million or 45% of revenue compared to $5 $1 million or 40% of revenue last year.
As we mentioned last fiscal year Q3, SG&A was lower by approximately $700000 due to salary expense that shifted to Q4, when we switched from a semi monthly payroll to a biweekly payroll during the fiscal year.
The increase in SG&A expense was primarily due to increases in personnel costs, driven by increased head count and salary increases due to competitive wage pressure in a tight labor market.
Increases in travel costs as COVID-19 restrictions have been removed, allowing for more in person conference attendance.
And increases in the cost of cyber and D&O insurance.
Income from operations increased 9% to $4.9 million.
Operating margin was 33% compared to 36% last year, reflecting the quarterly timing an increase in operating expenses.
Income tax expense was flat from last year at point $7 million while.
While the effective tax rate decreased from 16% to 15%.
This quarter, we recognized the benefit of R&D tax credits from prior years tax return amendments that we filed recently.
This benefit also reduced our effects the effective tax rate for the quarter compared to the rate for the first two quarters.
Net income increased modestly to $4 $1 million compared to $3.8 million last year.
Diluted earnings per share increased 11% to 20 cents compared to 18 cents.
Keep in mind that the lower growth rates for net income and EPS relative to last year were due to the impact of the taper all expense shift from Q3 to Q4 previously mentioned.
Adjusted EBITDA and adjusted EBITDA margin was $6 $3 million or 42%.
Compared to $5 $9 million or 46% last year.
Similar to net income and EPS. The decline was primarily due to the payroll expense timing last year.
As a reminder, we calculate adjusted EBITDA by adding back stock based compensation expenses 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 metric in our earnings release and on our website.
For our year to date net income I'm, sorry for our year to date income statement.
Total R&D costs year to date were $4.7 million or 11% of revenue compared to $5 $1 million or 14% of revenue last fiscal year.
R&D expenses were $2 $4 million or 6% of revenue compared to $2.8 million or 8% of revenue in the same period last year.
Capitalized R&D was $2 $3 million or 5% of revenue compared to $2.3 million or 6% of revenue in the same period last year.
SG&A expense year to date was $17.4 million or 41% of revenue.
Compared to $15 million also 41% of revenue last year.
Similar to the quarterly variance the increase in year to date expenses was primarily due to increases in personnel costs travel costs, Ciber and D&O insurance costs as well as increases in stock compensation and software licenses due to the implementation of Microsoft dynamic.
365, ERP and CRM.
Income from operations was $14 $2 million, an increase of 28% and operating margin expanded to 34% from 30% last year, reflecting increased revenue expense management and the leverage inherent in our software and services mix.
Income tax expense was $2.7 million versus $1.4 million last year with our effective tax rate increasing from 13% to 19%.
Last year, we saw lower effective tax rate, primarily driven by the tax benefits associated with disqualifying dispositions.
Net income is up 22% to $11.5 million and diluted EPS is up 22% to 56 cents.
Adjusted EBITA increased by 23% to $18 $7 million this year, while adjusted EBITDA margin expanded to 44%.
We ended the quarter with cash and short term investments of $122.5 million and no debt cash.
Cash increased cash decreased slightly due to the payment this quarter of the holdback and final earn out amounts with a lick soft acquisition.
We remain 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.
Thank you will.
Through three quarters, the year is unfolding as expected.
With continued strength in our software business and a noteworthy rebound for our service business.
New versions of our software expansion into new geographies and improved cross sell and give us confidence in our software revenue growth, while an increasing backlog with significant increases in the number of projects in our service business.
US confidence that we are well positioned headed into fiscal 'twenty three.
Longer term.
The use of modeling and simulation solutions as a way to bring in silica based efficiency to the drug development market continues to expand increasingly our solutions are core parts of a robust drug development program.
And the use of our solutions by regulators and our University plus program validate our place in this ecosystem.
In addition, the increased use of our software by smaller biotechs is a positive leading indicator demonstrating that a growing number of clients are adopting our modeling and simulation solutions.
In February we conducted our second annual model informed drug development or M. I D. D Conference featuring speakers from the F D. A.
Brazilian regulatory agency and visa Health, Canada and M. H R E U K.
This event provided attendees with case studies global regulatory perspectives on the development and validation of M. I D D.
We also had sessions covering the building and validating our machine learning models and using population PK P. D approaches to support late phase dose selection.
I'm, particularly proud of the women in science round table led by Cognizance divisional President Jill Fiedler Kelly.
This event highlighted meaningful topics for women within the scientific pharmaceutical industry.
Including the power of mentor ships closing the stem gap and bringing your authentic self to the workplace.
All talks are available for a replay and the simulations plus resource center and on our Youtube channel.
With that I'll be happy to take your questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if he would like to remove your question from the queue. So participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Matt Hewitt with Craig Hallum. Please proceed with your question.
Good afternoon, and congratulations on the strong quarter, maybe just a few questions. The first one high level shuttle what are you seeing in the market. Obviously, there's been a lot of concern over the past quarter or so Ah regarding pharma biotech funding given whats happened in those mark.
So anything that you could that you're seeing I think would be helpful.
Yeah, Matt Thanks.
Our visibility is actually quite positive in terms of both small pharma and small biotech.
Our investments and modeling and simulation.
Which is historically.
Lagged the larger players and began to see has really picked up not just in the sense of consulting acquisition, but also the movement of.
Our modeling people into their organization hiring earlier.
I think that's reflective of the.
The recognition of modeling and simulation and the impact it can have.
And our commitment to it.
Top to bottom.
Certainly the funding challenges.
Or are out there, especially in <unk>.
The biotech segment.
And we're cautious in terms of counting on.
That business in the long haul but.
But we've seen a pickup in terms of number of customers there, albeit a small footprints in terms of small projects single seat licenses and whatnot.
And so I see as a positive in terms of it.
Endorsements in terms of modeling and simulation and that's a penetration of adoption.
And yet cautious in terms of those organizations.
Our own.
Tighter budget today because of the funding situation.
That's helpful. Thank you maybe a question regarding income statement, how should we be thinking about gross margins here in the fourth quarter. You you provided some revenue guidance.
Should we anticipate that maybe the software gross margins kind of stay in that low ninety's range, but I'm not quite sure. When we should anticipate from a service margin as you know you kind of see a slow down here as you typically do in the fourth quarter.
Well I think I think our service margin has been relatively flat.
Through the last number of quarters.
I think we've been seeing some efficiencies brought into play there.
But we also see a lot of pressure in terms of the compensation side on the scientific staff side.
So the biggest impact in terms of our blended gross margin is going to come.
From that mix of software revenues and are consulting the purchase consulting revenues.
And you know we've been running ahead of the 60 40.
Split that we've typically been out with a soft for being a little bit a little bit higher than.
60% and that's helped our overall margins.
During the year.
We continue.
We're seeing in the fourth quarter. It is our slower quarter for both sides of her business. Both on the software side not a lot of software decisions made and they.
In the summer months in the middle of the middle of our clients' fiscal years.
The natural slowdown that occurs from vacation season coming into play in terms of the consulting business.
Got it one last one then I'll hop back in the Q&A, maybe will if you could help me with this I'm just starting just out of curiosity.
Did you run a constant currency renewal rate for the software business that you mentioned.
That that you know that the currency or FX was part of the decline that you saw there I'm just out of curiosity, what was the constant currency our renewal rate.
Yeah. It would have it would have up ticked a couple of percent I mean, we had about a $200000 impact on the currency exchange this quarter.
Got it that's helpful. Thank you very much.
Youre welcome.
Our next question comes from the line of Francois we bought with <unk>.
Oppenheimer. Please proceed with your question.
Hi, congrats on the quarter.
Couple of questions here.
In terms of guidance for next year can you just remind us maybe historically what gives you the coughing too to start looking at that kind of guidance.
Okay.
Yeah. Thanks, Frank.
The guidance time in terms of the next year at the end of the end of the quarter. We are you know.
It came out this year with a 10% to 15% guidance reflected.
Certainly a lot of momentum on the software side of the business as we came into the quarter.
But our service business that went out of the fiscal year 'twenty one into fiscal year 'twenty two.
You know as we look forward into 'twenty, three will be coming off of that continuing.
Continued strong performance on the software side.
Across our three.
Each of our three main product areas gastro plus.
Monolithic soon that that predictor.
And on the service side, which certainly in the first half of this year.
Back up or <unk>.
Backlog that drives that business and are starting to see a return to.
Good profit a good growth.
Growth.
The second half of the year, so going into next year, we certainly have both sides of our business operating at a much more out of strength as opposed to where we started this year. So I would anticipate.
A few months when we close the year out and issue guidance for next year.
We continue to see a robustness of the business into the next year.
Great and then if you yeah, if you expect software to be greater than 60% should we see that as you know with the.
Similar revenue guide should we see a little trim on the services side versus what you had expected.
But the bookings the service bookings were they a little softer than expected just any any color there.
In terms of the fourth quarter, specifically, frank or longer term.
Yeah, well it flips the 60% growth on the final year right. So maybe so far what you've seen in in service bookings and if you're expecting on the year greater yeah from going from 55 to 60 to greater than 60. She did that imply that you know with the similar revenue range should that imply that you know maybe there's a little soft.
On the services side versus prior expectations or not.
Yes, historically, the fourth quarter is a relatively soft on the on the servicing side so that.
But that's what that mix between the two businesses.
Well, it's sort of in both both sides of our business that's more dramatic on the scrubber side, yes.
Okay, Great and then on the I know that you mentioned that you know you'll talk about it when it's time to actually come in when there's something to say, but when you talk about the valuations, making a little more sense from the M&A front is that from discussions is that people are starting to realize you know maybe their values.
She used to be a little high or just any color at all that you can give would be helpful.
Yeah, I mean, it's.
Multiple discussions are ongoing.
Discussions are out there.
Clearly the market impact.
Impact in terms of the people viewed their alternatives or perhaps.
Going public.
Private funding or partnership through acquisition.
Leave the opportunity that is presented to them from.
I do like the other two directions in terms of IPO or funding there's.
There's a little bit more challenging now and therefore the <unk>.
Bigger in which there are the acquisition alternative that's being.
Looked at on the partners or potential partners out there and certainly won't.
Picked up of late so.
Calculation, there's always a.
Nuclear cheap to buy them and not something that is a that is simple, but certainly compared to a year a year and a half ago.
Both factors were a little different funding alternatives existed.
With a little bit a little bit more opportunity and the like.
Yo opportunity was also a little stronger.
<unk> today is certainly much better in terms of valuation.
Okay. Now that's helpful. Thank you very much and congrats again on the court.
Take care.
Our next question comes from the line of Dane Leone with Raymond James. Please proceed with your question.
Hi, Thanks for taking the questions and.
Congratulations on the progress maybe one more specific on the services side.
I guess just looking at the comps right. There there may have been more of an expectation for growth on the services side this quarter and I think the absolute number is still below that.
The comp for a 2020 Q3.
Yeah granted it's it's kind of a marginal Q on Q decline in the backlog.
<unk> to $16 7 million or 17 million last quarter.
Just curious, though for maybe more expectations around the fourth quarter and something you're seeing you know and in the fourth quarter right now as a trend.
That suggests there there might be a little softness in the fourth quarter on on services versus what you had been expecting you know the reason obviously the reason for this line of questioning as you know for all the biotech companies that I cover and work with their there is.
Clearly more of a funding issue and more rationalization in terms of the spending as we've gone into the middle part of this year. Thank you.
Yeah, Yeah I understand.
Yeah, no our softness if anything and the service side of the business is.
When it comes back to vacation in one of my observations is that after a couple of Ah I Covid impacted a year's time.
Who the people are taking vacations.
H Didnt normally take care of it in the last couple of years as they were maybe hometown and whatnot. So.
If anything we're just a little more exaggeration of that seasonality, it's not the ribbon.
The way by a cancellation on projects or a slow bookings at all we continue to grow service backlog 30 plus percent.
During this past third quarter.
The business is being booked there.
Small biotechs out there where or a small segment of our customer base.
Their core.
Not as impactful in terms of the ships there.
You know the success of funding.
And increases in spending or decreases in spending while we've seen an increase in the number of customers in that segment.
You know that that still is a small portion of our overall service business where software businesses.
As a whole so.
Little softness service business continue to.
Step up on its performance offer where we were at the beginning of the year, we will continue to improve.
But but will reflect the seasonality of our.
Of our summer time quota.
And maybe one follow up if I could in terms of.
Ducting potential business development deals or outright acquisitions are you getting more positive on the ability to execute transactions on on the services side or on the software side. Thank you.
I.
I Wouldnt say by my views shifting there at all opportunities exist on both sides of the ledger there.
Software in terms of products that would be good.
Tuck ins.
And extensions of our portfolio of data analytical tools.
On the service side, you know, we're always looking for opportunities to bring in a good.
Skill set of the scientific consultants in the book of business.
And our service.
Service offerings, there and especially looking to.
Extend our geographical coverage.
Which is a primary primarily focused in North America.
Region. So has there been any any change in terms of either our target.
Population out there, where our preference the answer would be no and <unk> in terms of valuation discussions I would say the change.
Change in evolution in terms of the valuation.
The discussions are very similar on both sides of the ledger there.
Thanks. So maybe final question for me can you just update us in terms of the business strategy in Asia to get exposure.
And.
You know any hiring you've done over there or just kind of plans for the remainder of the year.
Yes, certainly we are in Asia as a distributor covered a marketplace for us with distributors.
Two in China.
Korea.
In South Korea.
Japan and India.
Our Asia market in Japan has been our highest performer.
Store cleaned we're seeing you know.
Good growth and good opportunity in each of those regions and we're starting.
This last quarter, we hired to them.
Direct employee.
In the India market.
To assist.
Our distributor there a little bit more timely and approximate geographically.
As well as a take on some consulting service opportunities that we are we saw it in the marketplace. So I think that will continue to evolve in terms of our looking too.
Place more resources to supplement our distributors on a go forward basis.
That region of the World.
Thank you very much.
And again as a reminder, if anyone has any questions you may join the queue by pressing star one on your telephone keypad.
And it looks like there are no further questions at this time I would now like to turn the floor back over to Mr. Sean O'connor for closing comments.
Thanks, operator, and thanks, everyone for your interest in our company and joining the call today.
Look forward to.
Again, no short interval time next quarter.
The end of our fiscal year take care.
Okay.
And this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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