Q3 2019 Earnings Call
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Good afternoon, everyone on behalf of simulations plus I welcome you to our third quarter fiscal year 2019 financial results conference call and web hosting the call today simulations plus as CEO , Sean O'connor, the company's CFO John can Nigel.
An opportunity to ask questions will follow today's presentation. You may send your written questions using the questions pain on the control panel or in the U.S the hand, raising icon on your control panels ask your question directly please be sure to enter the unique audio pin displayed we 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 that involve numerous risks and uncertainties. The actual results of the company could differ significantly from those statements factors that can cause or contribute to such differences include but are not limited to continuing demand for the company's products competitive factors, the company's ability to finance future growth.
The company's ability to produce and market new products in a timely fashion the company's ability to continue to attract and 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 contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission with that said lets it during the call there Sean O'connor John .
Thank you Cameron.
This was a very strong quarter for simulations plus we made excellent progress with regard to our key initiatives for the year and our financial results are reflective of the return on these investments with increased revenue growth and profitability during the quarter.
As we have previously discussed we have historically grown revenues in that 10% to 15% range, excluding the effects of acquisitions.
We have been focused on delivering at the high end of that range and in the long run beyond that range, our third quarter revenue growth at 16% demonstrates good execution on this objective, especially compared to fiscal year 18, Q3 growth of 11% adjusted for last year's acquisition source growth.
Our software revenue growth achieved record levels in this our largest seasonality renewal quarter.
Our consulting revenue growth accelerated to 39% year over year, reflecting the growth of our service capacity through successful recruiting efforts and the significant projects related to Breanna, Sem and IP F, which initiated late last quarter.
We have made progress with respect to each of our key initiatives.
During the quarter, we hired another senior consulting scientists with business development skills, who is scheduled to start with us in the fourth quarter.
Not including this addition, we grew the consulting staff by three during the quarter and have now increased the company's consulting staff by 22% year over year.
This capacity growth is critical to our efforts to meet the strong demand for services across all three divisions.
I'm, especially pleased with our efforts to coordinate our sales and marketing effort across each of the divisions, which is beginning to deliver results.
During the quarter, we were successful in closing business with a large pharma client with a proposal that included both software products and consulting services sourced across our three divisions.
Internationally, we made progress as well.
While we did not add personnel in Europe during the quarter. We have hired two additional consultants who will begin in the fourth quarter in Europe doubling our staff in this geography.
In Asia, we have completed the expansion of our existing distributor relationships to include our deli some products.
While these investments add to expenses in absolute dollars, the resulting increased revenue growth rate as kept our expenses as a percentage of revenue at or below historical rates.
Our 16% revenue growth in the quarter was achieved while delivering a 20% increase in net income year over year.
Year to date, our 13% revenue growth was achieved while delivering a 25% increase in net income excluding the effects of last year's deferred tax benefit adjustments.
And not in significant significantly our cash position continues to grow net of continued to visit dividend payments and funding of deferred acquisition costs.
Overall, we made good progress on all key initiatives and I'm encouraged with the results and the team that we have in place to execute on our strategies.
Turning to our third quarter results by Division.
In our Lancaster Division overall revenue was up 7% year over year.
And 8% year to date.
Software revenue at $5.4 million is a record for the company in this our corridor with our highest level of renewal business.
Consulting revenue in this division grew 53% on a small base, reflecting the demand however for collaborative efforts for Gastroplus enhancements and PBPK modeling assistance overall, our our Lancaster Division continues to enjoy good revenue growth in line with renewable seasonality and in line with our historical growth expectations.
Breaking this down further 81% of our revenue was from renewals, 10% from new licenses and 9% from consulting.
Our renewal rates were 85% based on accounts and 93% based on fees.
Our license units of 284 were up 5% year over year.
We added seven new commercial companies and 11 nonprofit groups.
We have projects with 28 companies and for funded collaborations.
During the quarter, we strengthened our relationship with the regulatory agencies worldwide.
The FDA purchase to 15 user license for our ADMET predictor software suite.
The purchase was made by the center for tobacco products to support research projects aimed at informing regulatory decision making.
In addition, we received an order from the Pharmaceuticals and medical device agency in Japan.
To add licenses to its Gastroplus software suite.
As a reminder, working with the agencies like the FDA MPM da is important to simulations plus as a validates our modeling software and builds awareness throughout the industry.
Often employees at these regulatory body bodies ultimately leave to work for pharmaceutical companies.
And if they are positive experiences with our software they bring these experiences with them to the new employer.
In addition, during the quarter, we released version 9.7 of our flagship.
Physician logically based pharmacokinetic modeling platform Gastroplus. This version included improvements that supports safety and efficacy decisions first in human estimations formulas formulation optimization and drug drug interaction assessments.
We ended the quarter with 46 full time employees at our Lancaster Division up from 41 in the prior quarter and up from 38 last year.
Buffalo also excuse me Buffalo achieved 31% revenue growth year over year, and 20% growth year to date.
This has been a year of strong growth for this division. This performance reflects client demand and increased consulting resources to deliver projects Buffalo has built a solid pipe pipeline with new and existing clients.
We ended the quarter with 45 ft fees at our Buffalo Division up from 42 in the prior quarter and up from 41 last year.
Our research Triangle Park Division delivered robust, 44% year over year revenue growth and 21% growth year to date.
Delete them released natural DSMB version to a.
Quantitative systems pharmacology modeling software to support the development of treatments for non alcoholic fatty liver disease during the quarter.
We ended the quarter with 17 full time employees at RTP.
Flat at 17.
In the prior from the prior quarter and up from 15 last year.
Overall this was a good quarter for simulations plus with strong revenue growth consistent profitability and quantifiable progress against the initiatives with future growth impact.
Let me now turn the call to John to review detailed financial results John .
All right. Thanks, John appreciate it.
Look our consolidating that revenues for our third quarter fiscal year 19, they were up 16, 2.2% or approximately 1.4 million to 9.9 billion compared to 8.6 for the prior year.
By Division Lancaster's revenues were up seven or 6.6% or almost 7% to $6 million.
Buffalo revenues were up 30.7% to $2.5 million and RTP revenues were up 43.5 to 1.4 million over the same period last year.
Consolidated software and software related revenues were up 230000 or 4.1%.
And consulting service revenues were up $1.2 million or 39%.
The gross profit increased 16.6% to $7.6 million, representing a 76.6% gross margin in the third quarter fiscal 2019 compared to $6.5 million or 76.3% gross margin in the same quarter last year.
Cost of sales increase this quarter about $300000 compared to the prior year due mainly to growth in labour count as well as salary and benefit increases.
Accounting for the majority of the change.
As a percentage of revenues cost of sales was relatively unchanged decreasing slightly by 8.3% to 23.4%.
SDMA expenses were $3.1 million in the quarter or 31.1% of revenue.
An increase of about 500000 or 18.6.
Per cent compared to $22.6 million or 30.4% of revenue in the third quarter of 2018.
This increase in SGN Ache expenses was primarily the result of of wage and salary increases.
From stock compensation recruiting and hiring fees were included in there and we had an increase in full time CEO costs and the increase in head count in Lancaster, and Buffalo make up the majority of those at that time.
Our research and development costs during the period, we incurred $1.1 million of R&D costs that amount, we expense 643000, which was 6.5% of revenue.
$422000 was capitalized.
Overall, we increased our R&D spend by $73000 over the prior year.
The expense portion of 643000 increased by 135000 or 26.6% compared to 508 or 5.9% of revenue in the third quarter of fiscal year 18.
Income from operations for the third quarter fiscal 19 was 3.9 million up 464000, or 13.6% compared to 3.4 in the year ago quarter.
This was primarily the result of revenue growth outpacing for by the increase in costs and with the slightly higher gross margins that we saw.
Our provision for income taxes for the quarter was 964000, so effective.
Tax rate of 25% compared to 991000 in the prior year quarter and effective rate of 29.2%.
The effective tax decrease is attributable to the new tax act, which became effective in January of 2018.
Those lower taxes have allowed us to invest in the operations of the business.
This year, we've seen a 4.4% to 5% decrease in our effective tax rate.
This quarter's rate is just slightly higher.
Than the 23% to 24% annual rate, we anticipate for the fiscal year and that's really due to the third quarter being our highest income quarter of the year.
Net income increased by 483000 or 20.1% to $2.9 million for the most recent quarter compared to $2.4 million in the year ago quarter.
On a per share basis net income was 16 cents per diluted share in the third quarter compared to 13 cents the prior year.
EBITDA was $4.6 million.
This quarter up 13% compared to $4 million a year ago.
Turning to the nine months slides.
We'll cover some top high level items here.
Consolidated net revenues year to date for 2019 were up 12.9% approximately 3 million to $25.9 billion compared to 23 million in the prior year.
By Division Lancaster revenues were up 8.1% to 15.4 million.
Buffalo revenues were 20 up 20.5, $6.9 million and North Carolina, RTP revenues were up $21.3 million to $3.7 million.
Our year to date consolidated software and software related revenues were up $1.1 million or 7.8% and consulting service revenues were up 1.9 or 20.3%.
Gross profit increased $2.1 million or 12.3% with margins decreasing 0.4% to 74% from 74.4.
SGN expenses were 17.2% up over the prior year, a combination of mainly salaries recruiting and benefit related costs as well as some software licenses and the effect of sales commissions on the increase sales.
SDMA as a percentage of revenues.
Year to date.
33.2% down from 34.5% last quarter, which is more in line with our annual expectations.
R&D expense as a percentage for the year is at 7.3. It was 7.8% last quarter. It has now come back more in the 7% level, which is where we're expecting to be year to date.
Looking at the tax provision this year.
The effective tax rate your data is 23.9 and that seems to be right in the range that we anticipate for the annual basis.
One last comment on year to date information net income shows a decrease of $1.1 million for those who have followed us LP, you'll recall that last year. We recorded a 1.5 million dollar tax benefit in the second quarter of fiscal 18 due to the change in the tax the tax rates and the reassessing our deferred taxes.
That benefit.
Was a onetime benefit and is the main contributors to the decrease in the year to date income compared to the prior year.
As the calculation when we looked at.
Diluted earnings per share was about eight cents per share on last year's income.
Next turning to slide 11.
For a view of our quarter bye.
Revenue by quarter.
This slide shows our revenue.
On a quarterly basis.
From fiscal year 2015 through the most recent quarter.
Really illustrates the seasonality of the business, our third quarter tends to be typically strongest quarter, and we'll see a drop off in the fourth quarter, coinciding with the slowdown in our clients purchasing.
Project activities and project activities during the summer months.
On the next slide or income by quarter.
The state illustrates sort of a general track record of increases both year over year and sequentially through the first and third quarters with the fourth quarter typically being the lightest of the year.
On the next slide.
We see a similar pattern of net income with the third quarter typically being the strongest we've shaded the the effect of the $1.5 million deferred tax benefit as a tends to skew the presentation without highlighting that difference.
As expected.
If we go to the next slide.
The diluted earnings per share follows the same pattern and tracks with net income.
And then turning to the EBITDA.
Again as expected to see the seasonal patterns that would that would track with that.
Always a sort of a trend upward.
This slide illustrates our revenue by region simulations plus does reach businesses throughout the world. All the majority of our revenues are North American based you can see that Asian Europe are strongly represented but we do see those markets is growing source of revenues for the company.
On the next slide.
We provide on this chart a quarterly view of our cash and cash outflows for dividends and acquisitions and the impact of our cash over the last.
Basically five years now.
Beginning with the first quarter fiscal year 2015 on the far left fine.
The blue bars at the bottom illustrate the our consistent dividend payout and then in beginning of 2018, our board increased dividend payment to six cents a share of that's where that tick upward is on there and then moving up the chart.
You will see the the red bars represent in cash used for acquisition activities.
We spent nearly 15 million over the past four to five fiscal years.
On those on those items.
Most notably on the slide has been our ability to return cash to our shareholders through consistent dividends and we've been able to invest for future growth through acquisitions and maintain a healthy balance sheet.
And keep our cash balance.
Not borrow any debt.
As we've increased the value of the company.
Are as of yesterday, our cash balance was at $12.9 million. We do have a payout of about 1.7 to make for the next two months for acquisition payment on on our RTP acquisition.
But again today, we announced with our earnings release, the board of directors voted to distributed another six cents.
Per share quarterly dividend payable August onest.
Now I'll turn the turn the call back to Sean.
Thank you John .
In summary, this quarter demonstrated the continued returns on our growth related investments revenue growth outpaced increased spending and we enjoyed strong gross and operating margins leading to increased profitability.
Our revenue outlook is positive and tracking to hire the higher end of our growth expectations for 2019.
We continue to recruit additional staff in support of our service business.
And invest in our sales and marketing efforts and finally look to expand our international presence as this quarter is demonstrated the absolute dollar impact of these investments can be offset with revenue strong revenue growth.
I am encouraged with our progress and believe we are on track.
With that let's open it up for questions.
Thank you John once again like to ask a question on your telephone. Please use the hand, raising icon on the control panel and be sure to enter unique audio Ben Let me wait for any potential questions on the telephone will first start with some of the online questions that have been posed.
The first question comes from Howard Halpern.
And this question is you mentioned that large customer that will include software consulting services across the three divisions.
Do you have any additional proposals outstanding that will use all three resources.
For your three divisions, and how does the new renewed licenses with regulatory agencies globally play into your sales and marketing strategy.
Well first of all over the grade to the cross divisional as sales activity. Yeah, We're certainly targeting our larger accounts in any other opportunities for a more broad.
Sales process with them that covers all of our three divisions.
This process is initiating we've had some success to date.
There are certainly other opportunities in the pipeline.
For these sorts of efforts.
A lot of benefits that they come from this say, it's our ability to reach.
More broadly across our client organizations, both in the preclinical and clinical sides of their organization leverage visibility that we may have in those clients in one side or the other.
Into a broader understanding of what we can offer and they.
Less impacted areas historically.
Bryce or raise our visibility up the organization chart with them those clients.
So yes. This is a a key piece of our sales strategy one that we've really just the.
On the early early ground level efforts for good to see some results starting to come from it and I believe a lot of opportunity ahead of us in this regard.
[noise] regulatory opportunities as I said those.
People benefit in terms of the movement of people in the industry it much like.
Our efforts to provide academic licenses for.
Those institutions that leads to training using our products and as those individuals' matriculate into industry, they're familiar with our products and the increase of the day to them.
Beyond the people side, obviously and in many ways and more importantly, the.
Regulatory use of our products is a strong signal to the commercial marketplace out there.
In terms of the impactful use of our products in the regulatory analysis and decision, making process and a validation of.
Our software products that a that is sourced in the regulatory bodies using.
Our products, so theres, a tremendous validation and driving commercial.
Customers from the visibility, we get with our relationships on the regulatory side.
Thank you. The next question also from Howard is where does the key we communication and collaboration platform stand in terms of customer acceptance and revenue growth potential.
[noise], Yeah, we Oh, we had to release in the quarter as well on the on our Creed Kiwi product to.
Providing more functionality there we continue to support it and have a a loyal but small base of customers there and they are responding very well in the marketplace as a whole.
It's still one that is maturing maturing in the sense of.
The functionality the value that a kiwi product brings to the table.
It's still being accepted and evaluated in the industry as a whole or those that have adopted that sort of product.
Have typically had built a filter solution in house to meet their particular needs.
So piece a process that they have implemented in internally.
And blank in large ERP sales cycles are part of the challenge is getting clients to.
Recognize that well third party products can be tailored to meet their specific needs. A there is a some acceptance on that clients part of accepting.
Standard process that is embedded in a.
Third party solutions and so the market is working its way through that evolution right now we continue to support the Kiwi product we see.
An opportunity in the future.
It contributes a in terms of the small incremental growth.
Contributes in terms of visibility and the comprehensive nature of our software portfolio that we're able to offer.
In those presentations to to our clients. So there is value there in its revenue opportunity sets out in front of us still at this point in time.
Thank you Sean. The next question also from Howard Halpern to develop is what types of sales potential do you see in Europe will tilt more towards software or consulting services.
Well it certainly will provide the opportunity increased opportunity on both sides of our business, both the software and consulting side or if we see a good to.
18% to contribution from Europe , the already to the company's revenues as a whole. So it's not like we are entering a brand new greenfield marketplace. They are we do operate have supported the.
That geography on the software side, but.
The conference attendance and to sending our people there the presence of ER staff on site, a it's not a.
Hi, customer service application in the marketplace, but having presence there will help in that regard and so I see opportunity that will contribute on the software side significantly on the consulting side presence of or consulting staff on the ground in Europe will allow for a closer face to face interaction with our with our clients and to reach into.
New clients that to that perhaps we missed opportunities on in the past.
So I believe it will contribute both it certainly will have its impact to perhaps a little bit more greater on the consulting side, but it will be a contributor on both sides of our business.
Thank you and we have one final question from Howard Halpern Research analyst tablets brothers.
What is your.
What is your outlook for the recently released PK plus version 2.5 and can drive sales of your existing offerings.
[noise], Yeah, we as significant release of PK, plus just recently recently announced and is evidence of our continued process of.
Listening to the marketplace and responding with.
Enhance to feature functionality in the product.
Certainly the market is it is large we've got some.
Entrenched competitors, there, we're finding our nish and those clients, especially those that are utilizing a crossover modeling.
Opportunities using both DPP gay and PK PD approaches and.
So given our strength on the BBK PK side with the.
With Gastroplus, our PK plus product.
Enhances it gives a client that's familiar with our.
Application environment or a an opportunity to you know stay in their environments. If you will and I think a opportunity for PK plus will be enhanced as we integrate it to more closely with the with our other existing platform something that will come in a bigger way.
Potentially down the road with the re factoring.
Project.
Across our software applications.
So again, it's a product that is early in its penetration to the marketplace for us.
It is we are adding a new users on a quarterly basis.
And Ah that's positive.
It still is not of a size that is Uh huh.
Extremely material to the revenue growth today, but I think is a has its place and again the breadth of our software portfolio that we're able to offer our clients down the road and as we continue to add enhancements as we did again this quarter and I think it's a it's opportunity will only grow.
Thank you and we do have one audio question from Adam Keller, Please stand by while on the line.
So this is out of your life.
Hi.
So I was wondering solutions pluses and growing topline revenue to over 20% per year I was wondering at what point in time, you expect this growth rates decline and what you see is a stable long term growth of the business.
Well.
The historical growth rate of the company.
Well, we've jumped up to 20% and above if you look at those corridors, where we've been in that in at that level. It's it's usually been.
Contributed to significantly because it was a year in which we were.
Seeing the benefits of acquired revenue.
Versus comparable years, where that acquired company be of Cognigen or delay some did not exist in so the revenue growth percentage basis was enhanced by the acquisition revenues. If you go back and you look at the company on an apples to apples basis and extract that acquisition revenue the base business.
At each step of the way first of simulations plus alone and then would cognition and then the addition of delay some on it on an organic growth basis has grown 10% to 15%.
Within that range pretty consistently over the years a good results are more typically at the bottom end of that 10% to 15% range, but within that range.
We are today without any acquisition revenues are seeing our growth rate step up to the higher end of that range. This quarter was at 16% and our objective is to grow at the high end of the range and beyond that to meet what is a pretty aggressive adoption of modeling and simulation in the marketplace out there.
And so our opportunity from my perspective is one to continue to increase above the 10% to 15% annual revenue growth.
Acquisitions are a part of our strategy and when they come into play and they will bump our growth rate up the.
Temporarily during that first year after an acquisition and and we look forward to that benefit as well, but on an organic basis. Our sights are set pretty firmly on growing at the top end beyond that 10% to 15% range and certainly don't look out and see a decline in the future ahead of us at this point in time.
Thanks.
[noise] and we do have one no. Further written then question from Carl Hoffman and his question is you indicate that the payout ratio for the dividend is at 46% is the board thinking about a targeted payout ratio going forward.
Hi, the board down on a quarterly basis or in the process of approval for proving the dividend to always takes a look in evaluates the value the oh dividends and the.
In the marketplace, the investment community as well as the C.
The impact of it in terms of the operation of the company.
Always taking a look at it or is the payout ratio one of those metrics that is a part of that evaluation certainly.
And Ah so yes, it's a it's a quarterly.
Assessment that is a that is had by the board.
Thank you that completes the question and answer portion and also our competition Webinars for today. If you missed any part of today's presentation. The replay will be available at our website www dot simulation that plus dot com.
Thank you and have a great day.
Thanks, everyone.
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