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Executives

Isy Goldwasser - Chief Executive Officer

Rex Jackson - Chief Financial Officer

Analysts

Bill Gibson - Nollenberger Capital

Symyx Technologies, Inc. (SMMX) Q4 2008 Earnings Call February 11, 2009 5:00 PM ET

Operator

Good afternoon and thank you for joining us to discuss Symyx Technologies fourth quarter and full-year 2008 results. Joining me on the call today are Isy Goldwasser, Chief Executive Officer and Rex Jackson, Chief Financial Officer.

Before we begin, I’d like to remind you that during the course of this call, management will make forward-looking statements that involve risks and uncertainties. These forward-looking statements are made only as of today’s date and Symyx expressly disclaimed any obligation to update or revise information contained in a forward-looking statements expect as required by law.

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 current material, uncertainty and domestic and global economic conditions and international financial markets, which may continued to cause customers to delay or cancel significant purchases.

Any response to such uncertainty and economic conditions, Symyx may determine it is necessary to take additional measures to reduce its operating expenses, which may lead to further restructuring charges and cash outlays.

Failure to timely execute against existing contracts in order to recognize committed revenue as planned, inaccurate assessment of demand for Symyx’s offerings or failure to close new contracts with customers as forecasted. Failure to transition customers to the company’s Isentris platform and electronic notebook products, as quickly as estimated or to execute on software development roadmaps as planned.

Risk inherent and acquisitions, and subsequent integration efforts, loss of the customers and other risk describe in the company’s SEC fillings, including, but not limited to Symyx report on Form 10-Q for the quarter ended September 30, 2008.

An archive webcast of this teleconference will be available up to one year on Symyx website at www.symyx.com. In addition a telephonic tape replay will be available for one year by dialing 888-203-1112 for the U.S. and Canada at 719-457-0820 for International caller. Reservation number is 4934278.

I’ll now turn the call over to Isy Goldwasser, Symyx Chief Executive Officer. Please go ahead sir.

Isy Goldwasser

Good afternoon everyone and thank you for joining us today for Symyx’s fourth quarter 2008 earnings call. In our call today I will comment the performance of the company and our business units in 2008 and summaries the adjustments and improvements we have made to strengthen the company during the current economic downturn. Rex will then review our financial results and outlook for the first quarter and full year 2009, and I will close with the perspective for 2009.

Turning first to our 2008 results, you can see from our press release this afternoon that we took significant impairment, restructuring and other charges in the quarter in-light of the continuing deterioration in the global economic outlook. Rex will cover these charges in detail in a few minutes.

From an operating perspective I’m pleased to report that Symyx finished the year consistent with our expectations communicated in October and continued its good performance on cash. The company met its principal financial objectives of positive cash flow. Closing the year with more than $66 million in cash versus $45.5 million at the close of 2007, also we continue to have no debt.

Symyx Software finished the year with over $94 million in revenues at the high-end of our expectations, while the products and services contributed double-digit operating margins for the company.

Our integration efforts in 2008 have been successful; we have fully built out the Symyx Software management team both in the U.S. and abroad. Our customer outreach efforts have been quite successful in securing our existing software customers. Our product development efforts are on track against the well defined road map and our sales team is aggressively developing a pipeline of new opportunities.

Following a good Q4 in bookings, we continue to see our software business as a strong and stable core of our company. There were a number of key product launches in 2008 within Symyx Software. In April, we released Symyx Notebook 6.1 an Electronic Lab Notebook class 1, enabling our reorganizations to replace multiple yield ends with a single application that could be deployed across enterprise, while meeting the particular needs to biologist and analytical, medicinal formulation and process chemist.

As part of our continued rollout, in January we released Notebook 6.1, which support analytical chemistry and biology workforce. Symyx Notebook 6.1 offers significant time savings and improved data collection, security and compliance in a highly configurable package.

This release was a key factor in our recent success of two of the top 15 pharmaceutical companies. Eli Lilly is a committed [Inaudible] customer and as we announced earlier this month Schering-Plough has licensed Symyx Notebook in support of the company’s initiative to equip Schering-Plough research scientists across the company’s global R&D operations with a single, enterprise-wide electronic lab notebook.

We also continue to have good pilot activity for our Notebook offering in support of 2008 bookings. Our core Isentris platform rounded out the year with significant commitments from [Inaudible]. For Draw Isentris 3.1 informatics systems to develop and manage searchable databases to provide on-demand data through localized network for offline resources.

There were also numerous enhancements in the software product portfolio in 2008 that further strengthened our industry leading scientific software products and positioned Symyx software for long time success. As we announced in December, for 2009 we have combined Symyx Tools and Symyx Research to create Symyx High Productivity Research for Symyx HPR and equipped it with dedicated focused sales force.

As in our software business Symyx HPR focusing on delivering scientific solutions tailored to the need of our life science and chemicals and energy customers and significantly increased innovation in our new productivity. Specifically, Symyx HPR enables quite to conduct tenth, one at a time more experiment on a routine basis either by installing the HPR products or accessing HPR services.

Similar to Symyx Software, Symyx HPR is comprised a legal platforms and infrastructure with significant data to entry, but based on the micro-scale, parallel experimentation as a core competency. Symyx HPR finished the year with approximately $65 million in revenues, but the company is tools relating operations sustained significant operating losses in 2008.

The majority of the losses resulted from push outs or cancellations relating to two major customers, who in light of worsening global economic conditions reconsidered their capital expenditures at year-end.

As charges emerge in the fourth quarter and resulting end market outlook shifting downward, bringing a number of changes adjusted our business operations. Chief among these was the realignment and restructuring of our operations, including our 15% global headcount reduction we announced in December.

These actions, which primarily focused on the Symyx HPR and our general and administrative function, were substantially completed in the fourth and our design to drive performance, improved operation efficiencies and ensure continued positive cash flow and strength.

Assuming the strong conditions do not become significantly worse and we continue to execute. Symyx HPR is poised to substantial improvements in market performance in 2009, as a result of resizing and improved focus. The business has secured backlog for approximately 70% of its 2009 plan and has opportunities within various market segments to drive long-term growth and success.

Now, I would like to turn the call over to Rex for detailed review of our Q4 financial performance and outlook for the first quarter and full-year of 2009. Rex.

Rex Jackson

Thank you, Isy. So today, I’d like cover revenues, operating expenses, the significant charges taken in Q4, EPS and about the GAAP and non-GAAP basis, balance sheet items and our 2009 outlook. Before getting into the details however and as Isy indicated, our operating results excluding recent highlighted items are within the guidance we provided in October.

Revenue for Q4 was $42.6 million within a revised range of $41 million to $46 million. This was up from $38.9 million for Q3 but down from $48.5 million for the same quarter a year ago. Q4 reflects the strong year-over-year increase in software revenue, but that increase was more than offset by customer push outs and cancellation in tools due to the macroeconomic environment and the expected reduction in Research Services revenue following the mid-2008 expiration of our primary agreement with ExxonMobil.

Specifically, software revenue in Q4 was $24.5 million, up from $15.9 million a year ago. The approximately $1.1 million sequential decline from Q3 of this year was primarily due to the recognition of a significant revenues items in the third quarter. For the full-year, software revenue was $94.2 million at the high-end of our expected range of $91 million to $95 million.

On the recurring revenue front we met our renewal targets for the year, but did so with better than expected maintenance renewals and lower than the expected content subscriptions renewals. We will continue driving our development road map with customers with the goal of continuing to build our maintenance revenue in 2009 and we have major initiatives underway to strengthen our content business this year.

Overall, we continue to be pleased with Symyx Software’s performance and we were encouraged by good fourth quarter was up bookings as we entered 2009. HPR tools revenue was $11.5 million for the quarter, down from $19.3 million a year ago, once again primarily reflecting customer delays and cancellations on capital expenditures.

Q4 revenue was up $5.1 million from last quarter, due to the shipment of two tools totaling $4 million that pushed from Q3 to Q4. Q4 have lower than expected product margins due to a $900,000 reserve for inventory prior to oral cancellations and a reduce outlook.

HPR tools contributed $30.1 million to full year revenue compared with $39.5 million for 2007. As Isy mentioned, we have taken steps to size our HPR operations to meet the expected opportunities in 2009, but near-term revenues visibility for our tools remains limited. Our HPR services operations generated $6.6 million of Q4 revenue down from $13.2 million for the fourth quarter of 2007 and from $7 million for the third quarter of 2008.

HPR services revenue for 2008 was $34.7 million compared with $53.7 million for 2007. This decrease is mainly due to the anticipated $14.8 million year-over-year reduction in services and license fee revenue from our primary ExxonMobil agreement that expired in May.

Focusing now on customers, Dow our largest customer contributed fourth quarter revenue of $8.9 million and revenue for the year $28.6 million, finishing down $6.7 million from last year largely due to fewer scheduled tools purchases this year. Q4 revenues from ExxonMobil our second largest and only other greater than 10% customer was $7.2 million for the quarter and $24.2 million for the year down as expected.

Revenue from all other customers for the fourth quarter was $26.3 million or 67% and for the first time across the $100 million mark at $105.9 million for the year. 22 customers in this group exceeded the million dollars this year, contributing $56.5 million in the aggregate.

Turning to operating margins and expenses, our gross margin for the fourth quarter was 68% versus 71% in the fourth quarter of last year lower primarily due to increased services cost from our Integrity Biosolution operations and inventory charges in the current quarter. For the year, our gross margin was 72% again lower than the previous years 77% primarily due to higher amortization of intangible charges and to increase services revenues which typically carry lower margins.

Operating expenses for the fourth quarter excluding highlighted items were $30.3 million down from $32.7 million for the third quarter as a result of workforce reductions and lower expense accruals including bonuses. Regarding earnings for the fourth quarter we reported a GAAP loss of $97.6 million or $2.87 per share compared with the net loss of $3.3 million or $0.10 per share a year ago.

For the full year, GAAP net loss was $106.6 million or $3.16 per share versus GAAP net income for fiscal 2007 of $18.8 million or $0.56 per diluted share. In addition to GAAP results going forward we will be providing operating income and EPS on a non-GAAP basis.

To compute non-GAAP we will exclude amortization of intangibles and other acquisition related items as well as significant non-recurring items such as impairments and restructuring expenses. So defined, non-GAAP net income for the fourth quarter was 900,000 or $0.03 per diluted share, this compares with non-GAAP net income of $200,000 or $0.01 per diluted share for the same period a year ago.

Fourth quarter 2008 non-GAAP results exclude one-time items that collectively reduce GAAP earnings by $2.90 per share. Those items include a restructuring charge of $5 million in connection with our 15% workforce reduction in December.

This charge consist of $3.4 million in severance, $600,000 for fixed assets, approximately $600,000 for facilities consolidation and approximately $400,000 for other associated restructuring costs including outplacement services and legal costs. The cash impact of this restructuring will be predominantly realized in the first quarter.

Next, in light of the continuing severe deterioration of the global economic outlook and the resulting impact and evaluation, we conducted an analysis with the carrying value of our assets and determined if its necessary to take non-cash impairment charges totaling approximately $90.3 million this quarter consisting of $76.4 million in charges to goodwill and $11.3 million in charge to fixed assets and $2.6 million charge to intangibles.

Third, we took a non-cash, $12.5 million in valuation allowance against a certain deferred tax assets and in which we may not able to realize the tax benefit. Finally, our fourth quarter GAAP results improved a non-cash amortization of intangibles from acquisitions of $3.4 million consisting with our quarterly charges throughout 2008.

Moving onto the year on a non-GAAP basis net loss for 2008 was $5.3 million or $0.16 per share excluding $13.3 million for the amortization of intangibles from acquisitions, the other significant items I referenced earlier for Q4 and again a $4.9 million resulting from the sale of our equity interest in the Ilypsa.

As compared with the non-GAAP net loss for 2007, the $335,000 or $0.01 per share excluding $6.1 million of amortization of intangibles from acquisition and $2.5 million charge related to in-process research and development in connection with the company’s acquisition of MDL and a $40.8 million gain from the sale of the company’s equity interest in the Ilypsa.

Now, turning to cash; cash, cash equivalents and available for sale and securities in December 31, 2008 were $66.4 million compared with $45.5 million at December 31, 2007. We expect to continue generating positive cash flow in 2009. Capital expenditures for the quarter were $2.1 million, down from $2.5 million for Q3 and for the full-year $6.6 million, down from $8 million for 2007.

Now, I’d like to turn our financial outlook for 2009. For the first quarter, we expect revenue of $33 million to $37 million, approximately flat to last year’s first quarter results. Non-GAAP EPS is expected to be in the range of a loss of $0.07 to a loss of $0.03. For the year, visibility is limited and the external environment is challenging, however given our existing backlog, renewal estimates and near-term pipeline, we’re estimating 2009 revenue of $145 million to $155 million.

As we stated, we expect restructuring of our business operations from reduced 2009 operating expenses by an estimated $15 million from 2008 levels, excluding any restructuring charges. Most of this reduction will benefit R&D and SG&A. Further, we expect our depreciation for 2009 to be approximately $6 million, significantly lower than 2008, $11 million and that our capital expenditures for 2009 will be flat or below 2008 $6.6 million the current guidance ranges which we are seeing in mind.

We are forecasting non-GAAP EPS for the year of break-even to earnings of $0.10, the substantial improvement over 2008 non-GAAP loss of $0.16 on higher revenues. The non-GAAP purposes our estimated tax rate for Q1 and for 2009 is 39%.

While we like the visibility to forecast top-line growth for 2009, we have taken necessary measures we believe will improve the company’s margins and preserve positive cash flow. As one means of assessing the success of these measures in 2008, we will be using earnings before interest, taxes, depreciation and amortization to find this non-GAAP operating income plus depreciation and stock-based compensation.

EBITDA for 2008 was $7.2 million or approximately 5% of revenue. With the changes we’ve implemented today and continued expense management, our EBITDA target for 2009 is 10% of revenue.

Thank you and now I’ll turn it back to Isy for closing comments.

Isy Goldwasser

Thanks, Rex. While we continue to operate in a challenging environment, we are well-positioned as a company in 2009 with an improved organization. We continue to manage the business by applying our resources to the task with transforming scientific R&D for our clients, while delivering consistently better bottom-line results.

In 2008, we exceeded our cash flow expectations and produced 5% EBITDA performance. In 2009 we expect to achieve 10% EBITDA as a business. We aim to be in the minority of companies that sustain there businesses in 2009 and improved profitability while positioning growth opportunities to scale when the economy rebounds.

Thank you, now we’ll open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Bill Gibson - Nollenberger Capital.

Bill Gibson - Nollenberger Capital

Hi Isy. One of the things I’d like to zero in is HPR and it’s understandable the push out and cancellation of Tool sales, but with the dedicated sales force is there shift to getting company’s to outsource to the service side and what kind of feedback you get, if indeed that’s the case?

Isy Goldwasser

Hi Bill, that is a good question. We are clearly seeing more demand in the service side that we did last year and we are basically are trying to outsourcing, but the products side of the HPR business is still quite important and will continue to be important going forward.

Operator

(Operator Instructions)It appears we have no further question. So, I’d like to turn things back to our speaker’s for any additional or closing remarks.

Isy Goldwasser

Thanks everyone for joining the call and we look forward to reporting our results in our first quarter financial call next quarter. Thank you very much.

Operator

Thank you everyone. That does conclude today’s conference. You may now disconnect.

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