Accelrys, Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

Feb. 4.09 | About: Accelrys, Inc. (ACCL)

Accelrys, Inc. (NASDAQ:ACCL)

F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

February 4, 2009 5:00 pm ET

Executives

Ken Coleman – Chairman

Todd Johnson – Interim President and CEO

Rick Russo – SVP and CFO

Analysts

Steven DeLuca – Spinner Asset

Chad Bennett – Northland Securities

Adam Fischer – Burnham

James McAree [ph] – Neuberger [ph]

Michael Kaufman – MAK Capital

Adam Hutt [ph] – Hill Partners [ph]

Raghavan Sarathy – Dougherty & Company

Operator

Welcome everyone and thank you for joining Accelrys’ fiscal third quarter earnings call. Speaking today will be Ken Coleman, Accelrys’ Chairman of the Board; Todd Johnson, Accelrys’ interim President and Chief Executive Officer; and Rick Russo, Accelrys’ Chief Financial Officer.

Before they begin, I’d like to remind you that the following discussion, including the company’s responses to questions at the end of the formal remarks, contain forward-looking statements. These statements relate to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. Such statements include statements relating to the company’s future financial results and strategic plans and opportunities, including future orders, revenues, profits and expense, growth initiatives, new products, product capabilities, future markets and customers, and need and demand of existing and future customers.

These forward-looking statements are subject to a number of risks and uncertainties. Such risks and uncertainties include, without limitation, risks relating to the timely successful release and customer acceptance of new products, demand for the company’s new and existing products, successful execution of the company’s strategic plans and growth initiatives, and the impact of macroeconomic conditions. As a result of these risks and uncertainties, the company’s actual results could differ materially from those projected in these forward-looking statements.

Additionally, information concerning factors that could cause actual results to differ materially from these forward-looking statements is contained in the company’s SEC filings, including the company’s annual report on Form 10-K for the fiscal year ended March 31, 2008, quarterly report on Form 10-Q and current report on Form 8-K. The company disclaims any intention or obligation to revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Now, I would like to turn the call over to Ken Coleman, Chairman of Accelrys Board of Directors.

Ken Coleman

Good afternoon and thank you for joining us today. We announced on January 6th that Mark Emkjer was resigning as the company’s President and CEO, and that we were appointing Todd Johnson as the company's interim President and CEO.

We made this announcement after Mark and the board together reached the conclusion, a conclusion that it was time for a change in leadership for Accelrys. The board has initiated a search for a permanent president and CEO. We have every confidence in Todd and expect that his skills and experience will have a very positive impact on moving the company forward. As a board, we are very confident in the company's strategy and have asked Todd to focus on a more rapid execution of that strategy and to specifically work on the company’s go-to-market initiative. I think that you will see Todd has come up to speed very quickly. With that I will now turn the call over to Todd. Go ahead Todd.

Todd Johnson

Thank you, Ken, and also thank you for joining us today on our earnings conference call. I would like to start off the call by giving a little background on myself and my reasons for joining Accelrys. Following this brief introduction, I will turn the call over to Rick to provide you with our financial highlights for the quarter.

I commenced my career at Hewlett-Packard where I spent close to a decade. After leaving HP, I spent 11 years at Silicon Graphics. In both companies I held marketing and sales executive roles, and eventually became Silicon Graphics’ senior vice president of worldwide marketing. Interestingly, while at Silicon Graphics, I became familiar with many of Accelrys products and customers while co-marketing these products to several of the companies’ joint customers.

I was impressed at the breadth and depth of these products as well as by the uniqueness Accelrys occupied at the intersection of science and business. Throughout my career, I focused on sales and marketing. In my many roles I have created and implemented strategies to target my company’s products towards larger markets and large customers, finding ways to broaden distribution in order to increase overall sales and revenues.

Most recently as Chief Executive Officer at Kontiki, we retargeted the business towards much larger markets and larger customers, and bringing a keen focus on our go-to-market strategy and execution. This strategy was extremely successful and led to Kontiki’s acquisition by VeriSign. When I was asked to join Accelrys, I began refamiliarizing myself with the company. I was not surprised to find that Accelrys has an outstanding customer base, consisting of virtually all the world's largest pharmaceutical customers, numerous biotechnology companies, and many of the world's largest energy and chemical companies; nor was I surprised to find the company also had rock solid financials with over $70 million in cash and significant cash flows in its past two fiscal years.

Importantly, the company had built upon its very unique employee base consisting of numerous PhD scientists and expanded upon a vast reservoir of scientific products, several of which I was familiar with from my days at Silicon graphics. I was excited to see that the sales of the Pipeline Pilot scientific operating system has grown exponentially since the company acquired it in 2004.

Pipeline Pilot is rapidly being adopted by numerous scientific customers, thereby creating significant growth opportunities for the company within both existing markets and the new markets the company has begun to aggressively pursue. All these factors convinced me that this is a very unique company with great opportunity. I was asked to join Accelrys in order to maintain its momentum and to move its strategy forward during this period of leadership transition. Given my background and experience, I found its growth strategy appealing as it entails taking its unique technology and products to larger markets and new customers, while at the same time increasing its usage with an existing large customer base.

I'm excited to carry forward this strategy and look forward to contributing to the company's growth. I'm anxious to bring my skills and experience to bear on the go-to-market side of the business, and having spent a month working with the company's management team; I believe the company's long-term prospects are excellent.

More specifically, I am pleased with our quarterly results. Our revenue, income, and cash have all increased as compared with the third quarter last year. We have also continued to make strides in executing upon our growth strategy as I will detail later in the call. Before turning this over to Rick, however, let me briefly summarize few of our thoughts regarding the economy's impact on the company this quarter. In our prior conference calls, we indicated that we did not believe we would be immune from the macroeconomic conditions and in fact this quarter we began seeing the impact of the global recession has our customers, some of our customers delayed and/or cancelled orders particularly in the month of December. As a result, orders for our modeling and simulation products decreased as compared to the third quarter last year. Fortunately our platform continued grow at a healthy double-digit pace , so that overall our orders were essentially flat compared with orders obtained in the same quarter of last year. I will expand upon the economy and its implications for this, our fourth quarter, as well as on our operating highlights after Rick provides you with a detailed financial summary.

I will now turn the call over to Rick.

Rick Russo

Thank you, Todd. I would like to thank all of you for spending a few minutes with us today and allowing me to tell you about the financial performance of Accelrys in our third quarter of fiscal year 2009.

First, I’d like to point out that in the press release issued earlier today, references were made to both GAAP and non-GAAP financial measures relating to operating income, net income, and earnings per share.

The GAAP income statement includes in the listed expenses costs related to restructuring, amortization of purchase intangibles, and stock compensation expense, which are excluded from the non-GAAP financial measures. As a result, we have provided in the press release and in the Investors section of our website a complete reconciliation of these non-GAAP financial measures to the applicable GAAP measures.

Although not a substitute for GAAP presentation, we feel that the non-GAAP information allows for meaningful year-over-year comparison and fairly identifies the actual operating results of the company. It is this non-GAAP information that we use internally to monitor our financial performance. As a result, I’ll be referring to the non-GAAP financial measures for the rest of this call but will be happy to answer any questions you may have relating to our GAAP numbers during the Q&A portion that will follow.

Q3 was a good quarter for Accelrys. We increased revenue over $1 million and operating income over $2.7 million over Q3 of last year, and had another solid quarter of growth in orders related to our scientific operating platform. At Accelrys, we define orders as firm legal obligations that we expect will turn into revenue within the next 12 months. In the event we have multi-year deals, we will only count current orders the revenue value over the first 12 months. For those of you who are new to Accelrys, the majority of our orders once our obligations are fulfilled are generally recognized as revenue on a ratable basis usually over 12 months.

As a result, the impact from fluctuations in order rates generally does not have an impact on that quarter’s revenues but rather are recognized over the following quarters. In the case of transactions that include both software and services, the start of the amortization resulting revenue may be delayed until certain service deliverables are met.

As a result of this ratable recognition, year-over-year revenue comparisons will take into account the net change in order intake over the prior four or more quarters.

Specifically, revenues for the third quarter were $20.6 million, which represents $1 million increase over the third quarter of last year. The increase included a $600,000 usage adjustment from a major platform customer and absorbed the loss of $300,000 due to unfavorable currency fluctuation. This overall revenue increase was driven by continued growth in our scientific operating platform, which was partially offset by expected reductions from the products we have in Sunset and are phasing out over the past three years.

To the portion o have f our overall orders, these Sunset products declined from $11 million in fiscal 2006 to $8 million in fiscal 2007 and represented about $5 million of our orders in 2008. We estimate a similar $3 million decrease in our fiscal year 2009 as the phase out of these products continue.

While we do not break out growth by the platform, on a quarterly basis we can tell you that again this quarter we have achieved significant growth in revenue and orders from our scientific operating platform. This platform is the backbone of our scientific business intelligence strategy and although the follow-on solutions will include the pull through of many other Accelrys products and services, the platform orders are a good indicator of our success in providing scientific business intelligence solutions to our customers.

Our sales and marketing department track and analyze for the company customer orders by product type. Based upon these analyses, our scientific operating platform grew over 40% in the past year and represented over 22 million of our customer orders in fiscal year 2008. We believe that the platform orders will grow to approximately 35% of this higher base in this fiscal year.

Given that platform products are an increasingly larger portion of our overall orders, we believe at the beginning of this fiscal year that in each quarter of this year, the continuing growth in the platform products would exceed both the phase out of our Sunset products and any net change in our modeling and simulation products, resulting in an overall increase in order intake over the prior year. But order intake is up for the year due to the weakness in modeling and simulation in Q3 that Todd alluded to; the overall order rate in Q3 was basically flat to prior years.

As in prior quarters, before discussing the cost of revenue and operating expenses, I thought it might be helpful to give an overview of how seasonality affects our expenses. First, our orders have historically followed a seasonal pattern of approximately 30% spread over the first two quarters, 40-45% in Q3, and 25-30% in fiscal Q4. Since commissions and royalties are expensed on orders as opposed to revenues, this results in an increase in our expenses in our Q3 versus our second quarter. To restate our expense seasonality factors, in our fiscal Q1 we have merit [ph] increases; Q3 has the aforementioned, commission and royalties; and fiscal Q4 has commission rates at their accelerated levels and the first of the year payroll tax effect. For these reasons, we believe year-over-year comparisons may provide a better comparison of results than sequential quarters.

Our non-GAAP gross margin for Q3 was 81%, which was slightly lower than in Q3 of fiscal year 2008, which was 82%. The slight decrease in non-GAAP gross margin was primarily related to growth in our service departments during the current quarter. Expenses that we classify in non-GAAP cost of revenue are primarily costs related to royalties, product distribution, and cost to generate service revenue. As we gain traction with sales of solutions on our platform, we could generate more service revenues, which will be at a lower margin than software and may cause some slight downward pressure on our overall gross margin percentage.

The total non-GAAP operating expenses for the quarter were $14.4 million, which is $2 million less than Q3 of fiscal 2008. The primary drivers in the reduced cost to prior year were approximately $1 million in foreign currency benefit and the personnel costs related to the lower headcount we carried during the quarter. More specifically, we had expense gains of $838,000 in sales and marketing, $1,062,000 in lower cost and product development, and $116,000 of lower cost in G&A. The decreased sales and marketing costs included savings due to favorable currency fluctuations and lower headcounts in the current quarter.

Product development cost was lower due to the net effect of the reduction in force that took place in Q1 along with savings from currency. G&A were primarily noted – gains were primarily noted in reduced personnel and overhead costs in addition to favorable currency fluctuations.

Overall, worldwide headcount at 12/31/08 was 361 compared to 377 employees at 12/31/07. We would expect to be adding some headcount related to growing the platform in the fourth quarter.

In summary, we generated $2.3 million of operating profit in Q3. In addition to the $1 million in increased revenues compared to the prior year, we also had $1.7 million in reduced costs, resulting in 2.7 more non-GAAP operating income for the quarter than in the prior year.

Non-GAAP net income for the quarter was $2.5 million, which was $2.3 million more than Q3 of the prior year. The decrease from the operating income gain resulted from the effect of lower interest income due primarily to lower interest rate on invested cash.

Moving to the balance sheet, I’d like to point out that our orders, billings and cash flow are highly seasonal, with a large portion of our annual orders renewing in the December quarter, and most of the collections are receivables in the March quarter. As a result, our cash flow is seasonal with cash usage expected in the June, September, and December quarters followed by significant positive cash flow in the March quarter. Given this seasonality, I believe that a year-over-year comparison of cash as well as accounts receivables from deferred revenue would be more relevant than a sequential comparison. With that in mind, we had total cash and investments of $72.5 million at December 31, 2008, which represents a $6.7 million increase over the $65.8 million we reported a year ago.

This increase would have been higher except for the $1.9 million in cash we used to purchase intellectual property in Q1, and the mark-to-market write-down of $2.9 million to our auction rate securities over the past year. This was partially offset by foreign currency gain of $1.2 million. Despite the write-down, we expect liquidity of the auction rate securities at full value by July of 2010.

Also on the balance sheet, a key metric for us, given our ratable revenue recognition model, is deferred revenue. Deferred revenue represents the amount of future revenue we expect to book from customer orders that we have already invoiced. The deferred revenue balance spikes in our fiscal Q3, which is historically the highest quarter for orders, increases slightly in Q4 and then decreases over the next two quarters. At the end of Q3, our deferred revenue totaled $54.9 million, which is $14.8 million higher than last quarter and slightly lower than the $55 million in Q3 of last year. Our deferred revenue balance was negatively impacted as of December 31st versus the prior year by unfavorable currency fluctuations of $1.5 million.

Now that I’ve talked about Q3, I’d like to take a minute to provide an update to our expectations for 2009 that we addressed in the last conference call. First, as we’ve previously stated, we are expecting to grow orders and revenue in fiscal year 2009. Since we’re going from a flat to growth mode and our subscription-based model meaning our orders gets amortized, we should expect the growth in our revenues on a percentage basis and given our historical distribution of orders by quarter to be approximately 30% of what we’ll book in order growth.

Although we cannot predict the future effect of the current economic situation on our business, we do believe there were orders lost or deferred in Q3 due to the current economic climate. Given this reality, we believe that our orders for the fiscal year will grow at a low to mid-single digit percentage rate in fiscal year 2009 over fiscal year 2008.

Finally, I want to note that the Q4 operating results will include approximately $2.5 million of severance and related recruiting costs not previously anticipated.

So in summary, the third quarter of fiscal 2009 was a very successful quarter for Accelrys, and not only did we see continued growth in our platform products but we reported significant increases to prior year revenues, operating income, and cash.

With that I would like to turn the call back to Todd.

Todd Johnson

Great. Thank you, Rick. From an operating standpoint, we continue to focus on accelerating the execution of our growth strategy during the quarter. Due to our strategy is increasing the usage of our scientific operating platform within our large customers; I am pleased that this quarter, seasonally our largest quarter in terms of order intake, we have renewed several deals within our largest customers. Overwhelmingly, these customers usage of our scientific operating platform has increased significantly generally resulting in significant order dollar value increases.

We also continue to seek to diversify into other markets, which is a key component of our strategy. This quarter we entered into new licensing agreements with customers in the consumer packaged goods, energy, and chemical industries. These customers have a great need to better utilize their scientific and technical data. Our products are uniquely suited to meet these needs. As we previously indicated, we will continue to target these new verticals as we look to expand our addressable markets.

One way to target other markets is to expand our distribution channel. Pipeline Pilot, our scientific operating platform is flexible and uniquely suited to many scientific and technical applications beyond those used by the company's traditional life science customers. Thus, expanding our distribution channel is the focus of the company. Obtaining leverage from the distribution channel would enable us to gain a larger footprint in new markets much more rapidly.

Throughout my career, I focused on obtaining leverage from distribution relationships and intend to continue this focus going forward. We have previously announced OEM distribution agreements, which potentially enable us to increase the overall customer base for our products. In addition, as we look to capitalize on our scientific operating platform's unique capabilities, I intend to use the expertise of large system integrators by developing and marketing joint solutions to the system integrator’s large customer base.

The company has been in such discussions and I will place significant emphasis on these relationships in the near future. Finally, we released Pipeline Pilot version 7.5, the latest version of our scientific operating platform, with enhanced features including the improved enterprise deployment and security capabilities. This new release improves our platform’s ability to span our customer’s organization and to better meet the enterprise level needs of our customers. Enhancing our platform’s enterprise level features is critical to our strategy to increase the usage within our customer’s entire scientific and technical communities. And this new release helps us execute on this strategy.

Turning to our forecast for the fourth quarter, as we previously stated, we had expected a significant portion of the growth in our orders to occur in our third and fourth quarters since approximately two-thirds of our orders are taken during these two quarters. As I indicated and as we cautioned last quarter, we are not immune to the impact of the global economy. Accordingly, we saw the impact of this recession during our third quarter as some customers cancelled or delayed orders.

Our life science products were most heavily impacted by these cancellations and delays as some offer customers laid off many employees, including entire user groups and/or consolidated sites. Fortunately, as we indicated, orders for our scientific operating platform continued to increase at a healthy double-digit pace. Overall, our orders were essentially flat when compared to the third quarter of the prior fiscal year.

For the year, our order intake is slightly ahead of last year. While we can't predict the impact of the economy on our business, we believe it is prudent to reset our expectations for order intake for the year and currently believe that our order intake will increase by low to mid-single digits in fiscal year 2009 as compared to our order intake in fiscal year 2008.

Regardless of the economy, as we look forward to fiscal year 2010, we are excited by our prospects. Most importantly our scientific operating platform continues to grow at a robust rate providing us with numerous opportunities both within our blue-chip customer base and new customers in new markets. We will continue to focus on these opportunities in order to create long-term sustainable growth.

Rick and I will now take questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Steven DeLuca with Spinner Asset.

Steven DeLuca – Spinner Asset

Hi, actually my first question is for Kenneth, if he is still on the line, can you tell us what – a little more details around on your comment of time for a change means?

Ken Coleman

As I indicated earlier, Mark resigned after Mark and the board mutually agreed upon that really [ph] it was time for a new leadership change. Mark had done a tremendous job during this tenure in turning the company around, and the board is now on focus on finding a CEO that will create long-term sustainable growth.

Steven DeLuca – Spinner Asset

Okay.

Operator

And your next question comes from the line of Chad Bennett with Northland Securities.

Chad Bennett – Northland Securities

Yes, hi. Couple of questions, first Rick or Todd for that matter, the – you talked about the impact, foreign currency impact on deferred revenue and orders in the quarter were there – was there any impact from deals that were signed but had kind of different contract terms or unusual contract terms where you were not able to recognize the bookings, so to speak, in the deferred line?

Rick Russo

No actually, Chad, this quarter we were pretty clean at least from any deals of significance that we would have had to defer into different periods. So it was a pretty clean quarter from that perspective. There are always small ones that get tied up with services and maybe get deferred but for the most part, we did not have problems in that area.

Chad Bennett – Northland Securities

Okay, and then you talked a little bit about the macro impact on the business and I guess is it safe to say, you know, it is impacting deal flow both on the model and sim and the platform side, is there any better – you gave some color but is there any better color into what the push back could be on the platform side and maybe on the modeling and sim, you know, what – you know, in a pretty large renewal of bookings quarter, kind of what were renewal rates on that side?

Todd Johnson

Yes, I don't think we will necessarily give you exact renewal rates, but I think one of the things that we saw at the end of last quarter is that the business was really affected in two different ways. We had direct impact by large pharmaceutical companies primarily and also biotech scaling back on the number of scientists that would be using modeling and simulation software. So a direct connection between layoffs and the tools that those engineers or scientists would be using. So that was a direct connection. I think on the platform side, we had cases where budgets look like it had been secured all the way right up until the very end of the quarter and orders just were not executed, where you get through 4 levels of signature and at the fifth level of signature it would get pushed into the following quarter. So, I think depending on the part of the business you are looking at the impact is different, and we are quite fortunate to be in a position where a lot of our customers are looking for ways to drive up productivity because most of them are going to have to get more work done with fewer people, and the Pipeline Pilot platform fits well within that agenda. But it still made the predictability the orders right at the very end of the quarter a challenge and we have yet to see how that would impact us this quarter.

Chad Bennett – Northland Securities

On the platform side, were the signature issues and kind of delays you had there, was it across end-market or was it similar – was in life science and biotech?

Todd Johnson

I think it was across all markets.

Chad Bennett – Northland Securities

Okay.

Rick Russo

We still saw some very good renewals Chad on the platform deals, and as I think Todd mentioned in his notes that those renewals were generally at higher amounts than they were before. So it is all consistent with our plan of the platform going in and increased usage occurring in the major accounts and then renewing the next year for more.

Chad Bennett – Northland Securities

At a higher rate.

Rick Russo

At a higher – so that is still holding for us.

Chad Bennett – Northland Securities

Okay, all right. And then, Rick, could you explain to me the dynamic between the kind of updated ‘09 guidance a little bit, the dynamic between revenue growth and order growth, you know, prior you said because of moving from kind of flat growth to actually growing overall orders year-over-year this year that revenues would grow at about half the rate of bookings, and I think you said 30% of order growth now is, what is the difference?

Rick Russo

Yes, the difference is we're really refining the approach to doing that. It is a very inexact science and what we thought we would do. And I'm glad you asked that question because I can just explain it is that if you take the – our historical spread of our orders, which is the 15 to 15, 40 to 45, 25 to 30; I think is the way it goes, that if we then take the growth that we are going to have and assume that it is going to happen over the same spread, then you would get this 30% type of thing. I think if you just took $100,000 of growth and you split it up by those percentages, and then you said the 15,000 increase in the first quarter I'm going to get 75% of that; and then the 15% I get in the second quarter I will get 50% of it; and the 45% in the third quarter I will get 25% of it; in the fourth quarter increase, I don't get any of it, based on the way we amortize our revenue. You will see that that ends up being $300 or $300,000 on $1 million or 30%. So, I think it is safer for us going forward and it is safer when you're modeling to use that as a guideline. Now certainly to the extent that our orders come in different than our historical pattern that would tweak. But I think that this is safer approach for us. And that is where the number comes from.

Chad Bennett – Northland Securities

Okay and on gross margin, Rick, the 81% non-GAAP number that we saw this quarter, it sounds like services is ramping up. So that is going to be kind of the run rate looking forward to a few quarters.

Rick Russo

Well, services were up in the quarter and it did – it gave us a 1% impact, you know, if we have you know, we will keep you apprised if services really starts to ramp or some of these larger transactions come in and services spike more. Now we may have another point or two. I would think the overall range depending on how significant the services would get will still be only about a 3% type of swing from where we were to where we are now.

Chad Bennett – Northland Securities

Okay, and then Rick, do you want to take a stab, I know, last quarter of the year is a good cash generator. Assuming everything comes in where you think it is this quarter, the March quarter, what do you think – do you have a range for cash at year-end?

Rick Russo

Last year – last year we – it went up about $10 million in the quarter. We are at 72 now. You can see we did a really good collection. We had some good deals paid in this quarter. So the receivables are down a couple of million. So it is going to be, I don't see any reason that – not to suggest it wouldn't be somewhere around that $9 million to $10 million increase for the quarter, which would hitch up to the 81, 82 range.

Chad Bennett – Northland Securities

Okay.

Rick Russo

Which at the end of the year, given the fact as I mentioned that we have the out of our cash balance came the write-down of the marketable securities, which is temporary for us and then the – and if we did go on by that IP we talked about. So it has been a good year for us cash wise.

Chad Bennett – Northland Securities

Okay and I jumped on the call I think, kind of mid call, did we give any type of timeline or strategy on a permanent CEO?

Todd Johnson

This is Todd. Just that we have commenced a search and the Board is focused on getting it done as quickly as they can, and the process with the person running the executive search is well under way. So, I mean, we can all guess how long those things take but –

Chad Bennett – Northland Securities

I mean, are we thinking a quarter, two quarters you know is there any way to couch it, I know we are early in the process, and you want to eventually decide on the right person but how long should this take?

Rick Russo

I think it normally takes 4 to 6 months but the most important thing is we're going to take as long as it takes to get the right person, and we have an interim guy that we are very confident. So we will not panic if it takes a little longer.

Chad Bennett – Northland Securities

Okay, since we have a board member there and senior management considering a very healthy balance sheet at the end of the March quarter, may be $80 million plus in cash, no debt, you know, what are the facts or ideas about shareholder value on the cash side?

Rick Russo

Are you referring to doing things to buyback, some type of things like that?

Chad Bennett – Northland Securities

Yes, across-the-board everything, everything on the table.

Rick Russo

You know, we talked about this before and nothing has really changed Chad from our side. We are still actively looking at M&A opportunities. As you know, we have the cash balance. We have some restricted cash at this point still, and so even with a net amount we are evaluating specific M&A things, and that is really the route that we are going. So it gets raised on a regular basis. We consider all our options. Right now I think we are cash is king for us. We're sitting on it and we are looking at the right M&A opportunities because we think there are some really opportunities out there now that are good value for us.

Chad Bennett – Northland Securities

But clearly you know, we wouldn't do anything prior to a CEO being named I would assume?

Todd Johnson

I would not – this is Todd, I would not put that limitation. We have not put that limitation on the company and we continue to evaluate M&A opportunities. I have done M&A in my career and I think the board has every confidence that if we find the right kind of opportunity, we will move ahead prior to a permanent CEO.

Chad Bennett – Northland Securities

Okay, all right. Good enough, I will jump off. Thanks.

Rick Russo

Thanks, Chad.

Operator

Your next question comes from the line of Adam Fischer with Burnham.

Adam Fischer – Burnham

How are you?

Rick Russo

Great.

Adam Fischer – Burnham

Good. Can you talk, I think the SharePoint integration, you know the SharePoint product launch in December; can you talk about kind of any initial reaction to that?

Rick Russo

So I think overall the reaction to it has been really positive. And I think, you know, within the scientific community being able to use structured collaboration tools like SharePoint and to be able to share scientific information within that environment is something that we will continue to see as a trend. And the thing that we are excited about is that it gives us another place where we impact a real broad set of the scientific community with a unique toolset. So, the response has been very positive.

Adam Fischer – Burnham

Have they started or we started closing deals based on the SharePoint product?

Rick Russo

Yes, we have.

Todd Johnson

Yes, we have.

Adam Fischer – Burnham

Okay, and you know, to what extent do you think it will help enter some – our efforts to enter some of the additional verticals we have been targeting?

Rick Russo

I think it absolutely will. You know, I think any time you enter into a new market, finding very specific solutions that tie into existing infrastructure is a great advantage. And so because of the really broad adoption of SharePoint across, it is not just the life sciences marketplace but also across all of the new targets within the materials and other engineering markets, you know, it is a very good advantage for us.

Adam Fischer – Burnham

Have you disclosed in the past how much of the order growth is coming from kind of the non-traditional verticals?

Rick Russo

No we haven't, you mean outside of life science?

Adam Fischer – Burnham

Yes.

Rick Russo

You know, we have talked a little bit about the life science modeling in sim versus the non-life science modeling in sim and so they were about equivalent. But we have not segregated it that way.

Adam Fischer – Burnham

And you haven't discussed in terms of kind of the platform revenues?

Rick Russo

For the platform revenues, we have been giving – we have been giving information on that regularly about the growth of the platform, and the majority of the growth of the platform initially has been in the life science side, and we have talked about our strategies going forward and a lot of our investment actually going forward now is to take that platform into the other vertical side, where we think we have significant opportunity. But historically it has been mostly in the life science.

Todd Johnson

And on the platform side, we track penetration of new departments within current accounts, and penetration of net new account opportunities. So new customer names both on the model and sim side and on the platform side and it is – you know one of the things that we are putting a lot of attention into is not just growth within our current-account footprint but increasing the account footprint, especially on the CMM side.

Adam Fischer – Burnham

Great. That is it from me, thank you.

Operator

Your next question comes from the line of James McAree [ph] with Neuberger [ph].

James McAree – Neuberger

Hi, Todd, Rick. I just – a couple of things in the discussion here. It was nice to see the OpEx comp so favorably with the prior year, and you talked about possibly adding a little headcount now to grow the platform and just wanted to get a sense for how you are thinking about managing the operating expense side of the house.

Rick Russo

Well actually, I can tell you what we are looking at sequentially here in Q4, we have, I mentioned in the call in my script that we are going to be having, of course, some expenses related to severance.

James McAree – Neuberger

Those are one-time. I am not interested in those – kind of the continuing business.

Rick Russo

The only thing that happens sequentially for us is the kind of looking at OpEx, would be our vacation stuff, you know, we have very low vacation, actually favorable usage in our quarter when we have the Thanksgiving, Christmas stuff. We don't have that in the next quarter. So we will be incurring, it will be showing additional expenses going in there plus we have some programs that we had going in Q3 that actually slipped into Q4. So, although we did have very favorable OpEx expense gains in Q3, we will see some more expense in Q4. But on a go forward basis, we don't have any major expenditure plans from headcount standpoint and such that we are looking at right now. As I've mentioned before in our calls that our investments really at this point are going into the marketing side currently unlike lead generation and things like that that are going to allow us to penetrate the new markets.

Todd Johnson

I think we are taking a very conservative view of growing any recurring expenses going into next fiscal year, and yet that being said, we are very comfortable that we have enough expense in the plan to execute on our strategy and what you're going to see is some very, very limited headcount growth to give us enough horsepower to execute on programs that we are already confident is going to work or things that have already started to work, and we just need a little bit more horsepower to make it go faster.

James McAree – Neuberger

Right, thanks guys. I appreciate it.

Operator

(Operator instructions) Your next question comes from the line of Michael Kaufman with MAK Capital.

Michael Kaufman – MAK Capital

Hi, Ken. Thanks for being on call today. Are you still there?

Ken Coleman

Hi, Mike. I am here.

Michael Kaufman – MAK Capital

That's great. I wanted – for my records I wanted to confirm how many years have you been on the board and how much stock have you bought personally over that period of time?

Ken Coleman

Hi I've been on board since we brought in the company out.

Michael Kaufman – MAK Capital

How many years ago was that?

Ken Coleman

About 4.

Michael Kaufman – MAK Capital

Four years. How much stock have you got over that period of time?

Ken Coleman

Michael, I think you take my own personal financial situation off line.

Michael Kaufman – MAK Capital

Okay. Are you aware of how much all the directors combined over that 4 years have bought of their personal stock?

Ken Coleman

No.

Michael Kaufman – MAK Capital

I think it is zero as far as I am aware it is zero. Ken do you explain to the other shareholders on the call why you have person [ph] still in place?

Ken Coleman

Michael, as we have talked previously we have a number of government policies and procedures in place at the company and as you know, we review that at least once a year and we look in and compare ourselves with what the best practice are in the industry and we will continue to do that going forward.

Michael Kaufman – MAK Capital

Okay. But just for the records, in our last conversation, you told me you would check with the proxy services to what they consider best governments and best practices and as we are both aware, proxy services and most people consider a poison pill to the shareholder, unfriendly. And I also wanted to be on the record that, you know, I've offered to sign any sort of restrictions in terms of voting and standstill agreement so what not, and you know, the board has been totally unresponsive to doing anything for the benefit of shareholders or moving the stock up. You know to Rick’s point earlier, you know, you said; well, hey we have discussed before we want to save our firepower. We have some cash on the balance sheet, you know that was the last time you said that I think the stock was about 35% higher than today. You know at that point maybe the (inaudible) company was one-time its enterprise value to sales. I mean you could argue the company was cheap, but maybe not dirt cheap, but you know, at one point in the last quarter your company traded below the cash on the balance sheet and you know, I just have to ask myself both, you know, in a couple of the officers of the company stepped up and bought a little stock and I respect that but we didn't see a single board member, you know, step up and say, hey I can buy a dollar for $0.90 and then I get the company for free. Not one person did that and then on top of that there is no buyback in places. I'm sure there are some wonderful acquisitions out there, but you got to ask you something at what price does your own stock become a somewhat interesting acquisition in itself and, you know, without the board bidding well [ph] to buy stock, refusing to let a major interested – I've seen they care more about your stock price than you do just for the record, and I'm willing to help and work with you guys and say like this is a great company and it has a wonderful partnerships, and there could be some real value driven in here. Yet I see a lot of discompliancy. Hey, let's go buy another business even though our stock is trading at a ridiculously cheap evaluation. You know, a new CEO, who is not familiar with the business to a degree where I'm sort of shocked that he is, you know, ready to buy other companies when he hasn't even really been in the seat for the existing company for more than a few days when we had a CEO who had been around 4 plus years, and who I respect for being very conservative and not making the greatest [ph] acquisitions when valuations were much higher, but I just feel like we're getting paid a bunch of lip service here and sort of endless, you know, I think if you had your money at risk here, you would probably be a little more concerned that the stock trades at such a small premium to the cash on the balance sheet, when you have just a business here that is generating cash that has no need for all this excess cash and, you know, then if you're going to buy another business, you are going to have to explain to me why does it – why is that other business so much cheaper than your existing business, and for your existing business if this is fair value. I mean why not just sell it. I mean put it out of its misery. You know, I think there is probably acquirers for your business at this evaluation out there and I just feel like the directors are happy to collect the fee from the company every year. It is a comfy job, it doesn't take too much time, and in a day and age where we have been suffering from boards of directors that have been shirking their duties, I just – you choose to run the company for the shareholders for the existing shareholders, and as your largest shareholder, I can tell you on the record I don't feel like that's what's going on right now.

Rick Russo

Michael, you did a lot there. All I can say is, you know, we can’t control the stock price of the company.

Michael Kaufman – MAK Capital

So you can take advantage of it. If it goes – if it is so, I mean at what price. At what price is it just so cheap you have to buy it and if it is not we should be selling this company because obviously it is not worth anything right? I mean, just – well, there's got to be a price. I mean when the company’s one-time enterprise-value-to-sales looks like. You know, it is probably worth two times in a sale, but that is – there's got to be a price.

Rick Russo

We continue to evaluate it. But I think we should move on to the next question.

Operator

Your next question comes from the line of Adam Hutt [ph] with Hill Partners [ph].

Adam Hutt – Hill Partners

(inaudible). One quick question, I don’t know if it was addressed, I got on the call late. The SciTegic platform, was there any comment made about how quickly that is growing in and of itself. I think it was about 35% clip or 40% clip over the past few quarters.

Rick Russo

Yes, Adam we did. We talked about it in – I talked about it in my part of the script, and it is growing we are seeing – what we have been doing is giving an annual growth rate for it and we said the annual growth rate is 35%. So it's, we had very good renewal on the platform this year or this quarter and in those renewals we are renewing for higher amounts with the existing customers. So it is continuing to get stronger within the existing customers and that we are trying to bring it as, you know, into the other markets, to the other vertical markets.

Adam Hutt – Hill Partners

Okay good. And I just want to add that the last gentleman’s comments should be taken very much to heart and it will be nice to see some insider buying of substance. Thanks.

Rick Russo

Thank you very much, Adam. I appreciate it.

Operator

And your next question comes from the line of Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy – Dougherty & Company

Good afternoon and thanks for taking my questions. If I can go back to this – to the guidance where you said Rick, it looks like if I look at the high end of your order growth of 30%, we are looking at about 1-1/2% growth. It implies that you are looking at a sequential decline in revenue in the fourth quarter, can you help me understand first of all did I get this right, and second of all, can you help me understand was the impact, FX impact on this, you know, how could we explain the sequential decline. Can you break that into pieces?

Rick Russo

You are asking about the sequential – what I think about is the revenue growth on a sequential basis.

Raghavan Sarathy – Dougherty & Company

Yes, I mean it looks like it's – it looks like it will decline sequentially as well as, you know, if you're resetting the order growth and then the conversion of order to revenue.

Rick Russo

No that's not necessarily sure of. What we are saying really had happened in the quarter is that we had our order intake approximated our order intake of last year and according to – the way the model would work, for instance, if you replace the same amount of orders that fell off the books in subscriptions, then your revenue would stay about the same. If we are growing, as we've been doing and we have on an overall basis for the year, then you would see the run rate for your revenue going up because you would have more orders this past four quarters than the prior. So, what you should take away from the guidance that we have given is that in the third quarter, if our order intake approximated last year, then you would expect our revenue going into Q4 to approximate what it was in Q3. If we had hit the order growth rates that we thought we are going to hit before which was mid-to-high, then I would have had an increase coming in Q4 to that run rate. If it's about the same, then you get about the same run rate. Does that help?

Raghavan Sarathy – Dougherty & Company

Yes so. So you're saying that will be – is going to be sequentially flat as opposed to up.

Rick Russo

You know, there are a lot of variables that go into the revenue number and we really, you know, until we close the books next quarter we won't be able to tell you the effect on services and OEM, and various other things that factor into it, but it is general – from a general perspective that would be true. That's what you would expect if you had flat revenues in the quarter-over-quarter you would expect revenue to be about the same.

Raghavan Sarathy – Dougherty & Company

Okay. On the operating margin, can you give us some color on what, I mean, what you are expecting in terms of, you know, sequential margin improvement. I mean you talked in broad terms but your operating margin for the third quarter was well above what I was expecting. So can you give us some color on that?

Rick Russo

You mean the operating income margin?

Raghavan Sarathy – Dougherty & Company

Yes.

Rick Russo

Well, it was certainly much higher than – much higher than we had planned and much higher than last year. But that was the result and again we had very favorable FX in our currencies. Our second largest cost [ph] centre is in the UK and if you have been following the pound, you know, there was a significant drop in the pound in the quarter and that had a significant effect on reducing the expenses when they are translated over. So, you know, that was primarily the reason there and then we had some costs that were deferred in and we are also running at a lower headcount. So yes, we were higher from an operating margin. Some of those cost benefits will go away in Q4 because we are going to be – some of the programs that we are going to be enacting in Q3 pushed to Q4. So, we will have some more out of pocket expenses in Q4 in addition to the severance cost that I referred to in my script.

Raghavan Sarathy – Dougherty & Company

Right, but so are you implying it's going to be still up on a year-over-year basis but down sequentially because of higher costs?

Rick Russo

We are telling it will be down sequentially but certainly when you add in the severance (inaudible) of that size, you are going to be down sequentially.

Raghavan Sarathy – Dougherty & Company

Right but if you take out the severance.

Rick Russo

Yes. Without the severance I think we still would incur some additional costs in the quarter. You won't see a quarter like, I don't expect to see a quarter like we saw last time, you know this quarter.

Raghavan Sarathy – Dougherty & Company

Okay, all right. Thank you.

Rick Russo

More normal.

Operator

At this time there are no further questions.

Ken Coleman

Okay. Thank you very much. We will talk to you in a quarter.

Operator

And this concludes Accelrys’ fiscal third quarter earnings call. You may now disconnect.

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