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Isy Goldwasser – CEO

Rex Jackson – EVP and CFO

Analysts

Selka Kruger [ph] – JP Morgan

Bill Gibson – Nollenberger Capital

Dan Leonard – First Analysis

Symyx Technologies, Inc. (SMMX) Q3 2008 Earnings Call Transcript October 29, 2008 5:00 PM ET

Operator

Good afternoon and thank you for joining us to discuss Symyx Technologies third quarter 2008 results. With me on the line today are Isy Goldwasser, Chief Executive Officer; and Rex Jackson, Chief Financial Officer.

Before we begin, I would like to remind you that during the course of this call, management will make forward-looking statements that involve risks and uncertainties. The company does not to intend update its financial guidance or any other forward-looking statement prior to the next quarterly release and undertakes no duty to make any such updates.

Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others, inaccurate assessment of demand for existing and new offerings or failure to close new contracts with customers as forecasted; failure to transition customers to the recently released Isentris platform and Symyx electronic notebook products as quickly as estimated or to execute on software development roadmaps as planned.

Symyx's ability to close venture opportunities in third quarter of 2008 on terms acceptable to us or at all; risks inherent to the organization and leadership changes; risks inherent in acquisitions, significant restructuring and subsequent integration efforts, general economic condition in particular downturn in the Chemical, Energy, Life Science, or Consumer product industries; and risks associated with international sales and operations. These factors and other risk factors are described in the company’s SEC filings included, but not limited to Symyx’s report on Form 10-Q for the quarter ended June 30, 2008. Finally, a replay will be available for approximately two weeks at Symyx’s website at www.symyx.com, or by dialing 888-203-1112, and for international callers 719-457-0820, reservation number is 8974647.

I'll now turn the call over to Mr. Goldwasser.

Isy Goldwasser

Thank you. Good afternoon and thank you for joining us. Today, we are going to Symyx’s top line financial results for the quarter, and third quarter financial results highlights for our three business units Symyx Software, Symyx Tools, and Symyx Research. Rex is then going to provide a more detailed review of our financial results and Q4 and full year 2008 guidance followed by Q&A.

Turning to our third quarter financial results, we recorded total revenues of approximately $39 million, a 49% increase over $26 million for the same period one year ago, but below our revenue target of $40 million to $44 million. This result was due to the delayed shipment of two substantial Tools orders totaling approximately $4 million. These two orders have since been shipped.

EPS for the third quarter was negative $0.02 at the low end of our minus $0.02 to plus $0.03 estimate, as lower operating expenses offset the revenue shortfall. Symyx ended the quarter with $68 million in cash, in line with our expectations despite the originally unplanned cash outlays of approximately $10 million used in our acquisition of Integrity Biosolution.

Turning now to specific business unit updates. Symyx Software generated GAAP revenues of $25.6 million, up significantly from $5.7 million one year ago and software continues unplanned for the rest of the year.

Several third quarter product and field accomplishments in Isentris [ph], first, we are we are continuing the rollout of our Notebook 6.0 Platform. Symyx’s Notebook 6.0 replaces multiple discipline-specific Electronic Lab Notebooks with a single, flexible application, but is deployable across the entire enterprise. Our pilot program includes approximately 20 participants that should enable Symyx Notebook 6.0 to be a key contributor to the long-term success of Symyx Software. This will happen in the beginning of the first half of next year.

To underline dynamics of the work here, first customer interest and engagement with the 6.0 Platform remains strong, which is an important validation of our ELN strategy. Second, the customers have delayed making decisions in the result of market condition and pending the release of marginal rollouts, the first being an Analytical Chemistry Module, which is scheduled for December launch and the second the Medicinal Chemistry Module, which on track for end of Q1 launch in 2009.

While these releases will extend the pilot program for the 6.0 products, we expect that it will strengthen our ability convert pilot assessment into bookings. As we reported last quarter, we are also continuing our focused effort to support ISIS maintenance renewals fueled by new deliveries that provide support to the latest Microsoft Windows and Office environments, as well as smoother upgrade paths to the next generation Isentris platform.

During the third quarter, we launched Isentris 3.1, a key milestone as we continue efforts to migrate our customers from ISIS to Isentris. Isentris 3.1 functionality goes well beyond existing ISIS and competing software products by providing scientists new capabilities through a modern architecture including the freedom to create, manage, and share fully searchable local databases and to work offline.

We have secured a significant Isentris booking with a tier 1 pharmaceutical company and won a competitive process to participate in the pilot program for a large consumer products company. In the quarters to come, we will give additional data concerning customer adoption, but as of Symyx Notebook 6.0, we believe Isentris will be a critical asset for research organizations and scientists.

Turning to Symyx Tools, revenues for the third quarter were $6.3 million compared to $7.5 million for the same period one year ago. As mentioned earlier, revenue for the third quarter was adversely impacted by the delayed shipments of two systems, both orders were shipped early in the fourth quarter.

As with prior years, the fourth quarter is the most important for Symyx Tools. However, Tools bookings in the third quarter were below our expectations, and we believe current uncertainty in domestic and global markets may cause our customers to delay or cancel significant capital purchases such as Tools.

Accordingly, as Rex will detail in a moment, we are maintaining a cautious outlook in Tools for the fourth quarter. Despite this cautious outlook, we will continue our focus on improving profitability in Tools, meeting our commitments in place from our alliance partners, Dow Chemical and Exxon Mobile, who remain strong supporters of our Tools offerings, and continuing the diversification of our customer base and non-alliance customers. Notably, to date in 2008, non-alliance customers have contributed well over half of our Tools revenues.

We have also responded to market trends and realigned some of our Tools offerings to ensure responsiveness. For example, during the third quarter, Tools launched a basic configuration bench top system for consumer products and set the stage for our first quarter 2009 launch of a platform-focused and a growing opportunity for chemicals applications.

Turning to slide 7, revenue for the quarter in our Research business was $7 million compared to $12.8 million one year ago reflecting decreased Research revenue Exxon Mobile. Research Services was launched approximately one year ago to target a broader customer base within a shorter sales cycle in our Legacy Collaborations business.

We are getting meaningful traction in both our target markets in this business, Chemicals and Life Sciences. In Chemicals, we have several important bookings lined up in the fourth quarter and a growing pipeline of additional opportunities.

With respect to Life Sciences, highlights include the acquisition of Integrity Biosolution, which provides contract formulation research and analytical services and expands our services to the growing large molecule formulation market. This acquisition was targeted to complement our existing capabilities in small molecule formulation.

Second, in addition to bookings with tier one pharmaceutical companies such as DMS, which we announced last quarter, our Research Services team is making a concerted push into tier two and tier three pharmaceutical and biotechnology companies. We believe there is a substantial growth opportunity in these markets and we are accelerating our sales and marketing initiatives accordingly.

As we have discussed in prior calls, our Research Services business includes step change value opportunities through ventures and partnerships. We expected one such venture, an internal bio-refining initiative, planning our core expertise in Catalysis, would be launched in the third quarter.

However, as of many financing and capital market dependent initiatives, recent market events have delayed the venture financing and prompted a reassessment of financing terms. We have consistently stated that we will pursue this venture opportunity only if it is structured on the terms that generate sufficient value to Symyx shareholders.

While I cannot predict the specific outcome of our ongoing negotiations, I can tell you we will not enter into an arrangement that falls short of the standard. A final reminder concerning our Research Services business, as we have stated previously, we have forecasted a decline in alliance revenue within Symyx Research in the second half of 2008 as a result of existing contracts coming offline. Our current guidance includes this anticipated reduction.

I would now like to turn the call over to Rex for a detailed review of our Q3 financial performance and outlook for the fourth quarter and full year. Rex?

Rex Jackson

Thank you, Isy. As Isy indicated earlier, third quarter revenue was $38.9 million, below our guidance range of $40 million to $44 million, and down 4% from Q2. Q3 revenues were up 49% over the third quarter of last year with Software’s four-fold increase offsetting lower results in Research and Tools.

Specifically, Software contributed $25.6 million this quarter versus $5.7 million in the third quarter of last year driven by our Q4 of 2007 MDL acquisition. Sequentially, software also improved 6% over the second quarter due primarily to the further normalization of our recurring revenue as the MDL revenue that we cannot recognize under GAAP declined from $2 million in Q2 to $1 million in Q3.

Software has performed consistently this year and we expect this business unit to finish 2008 at the high end of our original GAAP estimates of $91 million to $95 million.

Our Research business contributed $7 million, down from $12.8 million in Q3 of 2007 and from $10 million in Q2. Both decreases reflect expected reductions in Research revenues in Exxon Mobil following the expiration of our primary collaboration agreement at May 31, of this year. At $1.5 million for this quarter, Research revenue from Exxon Mobil declined $5.4 million from Q3 of last year and $3 million from the second quarter of 2008.

Our recently launched Chemicals, Energy, and Life Sciences Services offerings improved sequentially and are expected to contribute more than $4 million in 2008. With the acquisition of Integrity Biosolution in Q3, a business we should exit calendar 2008 with an annualized run rate of approximately $3 million, we plan to continue focusing on these new Research Services opportunities as the key areas for growth.

Symyx Tools contributed $6.3 million, down from the third quarter of 2007’s $7.5 million and slightly down from Q2 of $6.6 million. Our guidance range for Q3 included Tools revenue of over $10 million; however, as Isy explained we did not complete customer validations on and thus did not shift two systems at the end of the quarter totaling approximately $4 million. These systems have been shipped and we will recognize the associated revenues in Q4.

Focusing now on customers, Dow is now our largest customer contributing third quarter revenue of $7.3 million above $5.7 million in the same quarter of last year due to higher Tools revenue in the current quarter. Q3 revenues from Exxon Mobile, now our second largest customer, were $3.2 million, down as expected from $8.4 million in the last year’s third quarter and Q2 of $6.2 million due primarily to reduced Research revenues.

Collectively, Dow and Exxon Mobile represented approximately 27% of third quarter revenues down from 32% in the second quarter and down significantly from historical levels due to the combination of increased revenues in our software business and decreased contributions from these two major customers.

Revenue from all other customers for the third quarter was $28.5 million or 73%, up from 68% in Q2 as we continue working to broaden our customer base. Our top-20 non-alliance customers have contributed year-to-date revenues of $43.2 million or approximately 37.1% for the period with 18 non-alliance customers exceeding $1 million year-to-date.

By business units, non-alliance revenues represented approximately 89% of Software revenue, consistent with Q1 and Q2; 58% of Tools revenue in Q3, down from 66% in Q2; and 27% of Research for the quarter, up from Q2 primarily due to the reduction in Research Service business with Exxon Mobile.

Moving now to earnings, our third quarter loss was $0.02 per share within our guidance range as lower expenses offset the short fall in revenues and increased expenses from the Integrity Bio acquisition. Earnings also included a favorable impact in other income and expense, as we collected our final holdback payment of $4.8 million in connection with the 2007 sale of Ilypsa to Amgen.

For Q3, we exclude from our reported revenues approximately $1 million of MDL deferred revenue we cannot recognize under GAAP. If included, those revenues contribute approximately $0.02 per share to our operating results. Our Q3 expenses include $0.06 from noncash amortization of intangibles from acquisitions and $0.02 of noncash stock-based compensation expenses.

Moving now to cash, our Q3 closing balance was $67.6 million within our estimates of $65 million to $75 million despite the expenditures of approximately $10 million in connection with the Integrity Biosolution acquisition completed in August.

Cash declined from Q2 as expected due to the cyclicality of our operating cash flow with higher collections in the first half of the year from Software and in Tools from Q4 shipment. Deferred revenue moved from $45.9 million at the end of Q2 to $33.5 million at the end of Q3, also reflecting our Software business cycle.

Capital expenditures for the quarter were approximately $2.5 million, up from $1.3 million in Q2 and up $4.5 million year-to-date. We continue to expect 2008 expenditures to be below 2007’s $8 million dollars.

Looking forward, we believe recent market conditions will temper customer activity on major capital purchases. Accordingly, while we have a path to results within our guidance ranges for 2008, we are lowering our fourth quarter and full year guidance to account for the greater uncertainty and lower visibility in the market at this time. For the same reasons, we are not in a position to provide an early view of 2009 at this time.

For Q4, we expect revenue of $41 million to $46 million and GAAP EPS of a loss of $0.09 to a loss of $0.04. We expect a greater loss in Q4 despite higher revenues than in the third quarter, primarily because Q3 included approximately $0.09 to the benefit from the Ilypsa payment.

Expense estimates for the fourth quarter include amortization of intangibles of approximately $0.06 per share and stock-based compensation expenses of $0.02 per share. For the year, these Q4 estimates translate to revenues of $157 million to $162 million and a loss per share of $0.36 to $0.31.

For the year, we exclude from our Software estimate of $7.4 million of 2008 MDL deferred revenue we cannot recognize under GAAP, which would if included contributes an estimated $0.14 to our 2008 operating results.

Our expense estimates for the year include amortization of intangibles from acquisitions of $0.24 and stock-based compensation charges of $0.08. Our estimated 2008 tax rate is 40%.

Regarding cash, despite changing conditions, we continue to expect cash at the end of 2008 to exceed 2007’s $45.5 million reaching $50 million to $60 million at the end of the year notwithstanding the Integrity Biosolution acquisition.

Looking at the year from a business unit perspective, as I stated earlier, we expect Software to be at the high-end of our previous revenue range for the year at $91 million to $95 million. We also expect Research to reach $34 million to $36 million, exceeding our previous range of $30 million to $33 million. In our revised guidance range, we are expecting Tools to be significantly below our original range of $44 million to $47 million.

Thank you and now I will turn it back to Isy for concluding comments.

Isy Goldwasser

Thank you Rex. Over the course of the year, I have reiterated several success factors for 2008. These include first, continued performance and improvement of Symyx Software; second, achieving Symyx Tools’ objectives through a mix of configurable and entry-level products and custom products; third, in Symyx's Research, building on the early success of our Research Service offerings and advancing the launch of bio-refining venture; fourth, increasing quarter-over-quarter effectiveness of our sales organization; and fifth, maintaining our commitment and focus on the operational and expense management side of our business.

Our year-to-date performance and first progress of Symyx Software, the establishment of a foundation for non-alliance growth in Research Services, and good management of operating expenses. At the same time, we have fallen short of the mark in other areas those notably with respect to our 2008 bookings targets, with respect to the performance of Symyx Tools, and in advancing the launch of our venture.

Importantly, with the balance of our progress, we expect to be cash flow positive for 2008, a key objective outlined early in the year. Looking ahead, however, our outlook for the fourth quarter and the full year is tempered directly in response to market condition. Because visibility is also being compromised by uncertainty in our end markets, we are not in the position at this time to provide specific guidance for next year.

We are now reassessing our plans in light of the changing market environment and are committed to improving cash flow and profitability in 2009, and to do so in the challenging market environment.

Thank you for your continued interest and support. We look forward to updating you on our progress shortly.

Operator, I would like to now turn the call over to questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) Our first question will come from Jeff Zekauskas, JP Morgan

Selka Kruger – JP Morgan

Good afternoon, this is Selka Kruger [ph] for Jeff, how are you?

Isy Goldwasser

Good, how are you?

Rex Jackson

Hi, how are you?

Selka Kruger – JP Morgan

Good. A couple of questions, very good software results. The change in revenues by Dow, both sequentially and year-over-year, is that due to increased Software revenues as well?

Rex Jackson

So, from a Research standpoint, they are fairly consistent. From a Tools standpoint, it moves around quarter-to-quarter a good bit, but I would say that the dominating factor is the increase in Software revenues.

Selka Kruger – JP Morgan

Okay. And on the Tools side, the orders that are sort of falling off of the ones that you have expected that may not happen in the fourth quarter, are those Polymorph Tools or Polyolefin Tools? Do you have a little more detail on that?

Isy Goldwasser

They' really actually cover a set of market segments. At least they are not just focused on a particular application. They really impact, both Life Sciences Preclinical Development, Consumer Products, and Chemicals.

Selka Kruger – JP Morgan

What is the likelihood that you'll recover those Tool sales in 2009 or is too early to tell?

Isy Goldwasser

As Rex said, I mean, we have a path to actually achieve our – achieve revenues that put us in the original range above $165 million, but because of the uncertainty, we simply cannot tell that customers are going to delay or outright cancel these programs, and so we are really going to learn that in the next 30 to 45 days.

Selka Kruger – JP Morgan

Okay, and then just a question for clarification. The after-tax you gain from the sale of the equity interest in Ilypsa, was it similar to the pretax gain? Was it $4.9 million or was it less than that on an after-tax basis?

Rex Jackson

Yes, tax is back here [ph]. The acquired tax rate, because it is a gain we actually have to pay taxes on it notwithstanding the fact we are in a loss position.

Selka Kruger – JP Morgan

So, it does get tax-affected?

Rex Jackson

Yes, it does.

Selka Kruger – JP Morgan

Okay, so one uses like a 35% rate or the 40% rate?

Rex Jackson

I would say 35% or 40% is fine, yes.

Selka Kruger – JP Morgan

Okay, thanks very much. I will get back on the queue.

Rex Jackson

Okay.

Operator

And our next question will come from Bill Gibson with Nollenberger Capital.

Bill Gibson – Nollenberger Capital

Hi, I think I understand the issues, but in general is it safe to say most of your caution is the Tool area as opposed to Software?

Isy Goldwasser

Yes, because it is fourth quarter, clearly it is the Tool area, and that and that has to do with the fact that the fourth quarter is highly dependent on the Tools shipments and the fact that Tools, of course, have large capital expenses which really is the highest risk items in the current environment.

Bill Gibson – Nollenberger Capital

And looking at next year, you mentioned the focus on – and you want everybody to re-go on ISIS and at the same time trying to upgrade people to Isentris. Could you give us a little more detail as to that exactly what is behind there in terms of making it easy for somebody to upgrade?

Isy Goldwasser

Sure. As you pointed out, we are going to enter the renewal period for our ISIS products in the fourth quarter and the first quarter, and typically what we do is, when we engage with customers on upgrades, we really bundle the deals and we make it easy to transition, obviously their license and maintenance payments from ISIS to Isentris. So, for them, it is only a deal that blends that and in that fashion we upgrade them. They usually make a new payment for a new license for Isentris and then we basically carry over transition of the maintenance from ISIS to Isentris.

Bill Gibson – Nollenberger Capital

Okay, thank you.

Operator

(Operator instructions) Next, we have Dan Leonard with First Analysis.

Dan Leonard – First Analysis

Isy and Rex, why do you think your fourth quarter revenue will be higher than your third quarter revenue?

Isy Goldwasser

Well, it has mostly to do with the fact that our Tools revenues are typically highest by quite a bit in the fourth quarter, and even despite the caution we are taking, we believe that the revenue we see, we cannot forecast accurately, will lead to a better quarter in the fourth quarter.

Dan Leonard – First Analysis

Okay, so there are Tools commitments you just feel hard and fast will not get pushed out?

Rex Jackson

That is right.

Isy Goldwasser

That is correct.

Dan Leonard – First Analysis

And then the operating expenses in the quarter, is that the new run rate?

Rex Jackson

I do not think you could actually take that as a run rate, and the reason for that is that there are certain adjustments in the quarter, for example, with respect to bonus accruals that are made, so run rate would be slightly higher than that as the Q3 figure.

Dan Leonard – First Analysis

And then finally Isy, I know over the past several years, you guys have worked to bring down the costs of your Tools, can you remind me the average of the median Symyx Tools price as we stand today?

Isy Goldwasser

Dan, now the median price I would say is between $700,000 and $1.2 million and there are Tools above that and there are systems that are that are living [ph] between $0.25 million and $0.5 million that we have put a lot of effort it this year. But I would say, on average, we would be in the range of $750 million to $1.2 million.

Dan Leonard – First Analysis

Thank you.

Operator

(Operator instructions) At this time, there are no questions in the queue. I will turn the conference back over to our host, Isy Goldwasser.

Isy Goldwasser

Great, thank you. Thank you everyone for participating on our call this afternoon. Rex and I look forward to speaking with you again and updating the investment community on our next call.

Operator

And that does conclude our conference call. Thank you for joining us today.

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Source: Symyx Technologies, Inc. Q3 2008 Earnings Call Transcript

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