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Accelrys (NASDAQ:ACCL)

Q1 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Todd Kehrli - Co-founder and Executive Vice President

Scipio Carnecchia - Chief Executive Officer, President and Director

Michael A. Piraino - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Analysts

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Kevin Liu - B. Riley Caris, Research Division

Greg McDowell - JMP Securities LLC, Research Division

Matthew J. Kempler - Sidoti & Company, LLC

Operator

Good afternoon. My name is SaraLee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Accelrys Q1 2013 Earnings Conference Call. [Operator Instructions] Mr. Todd Kehrli, MKR Group, you may begin your conference, sir.

Todd Kehrli

Thank you. Good afternoon and welcome to Accelrys' 2013 First Quarter Financial Results Conference Call. A press release was issued this afternoon detailing these results and may be accessed on the company's website at accelrys.com under the Investor Relations section. Speaking today will be Max Carnecchia, Accelrys' President and Chief Executive Officer; and Michael Piraino, 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, will contain forward-looking statements relating to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. Such statements will include, but may not be limited to, statements relating to the company's expected GAAP or non-GAAP revenue, earnings, EBITDA, cash flow, depreciation, capital expenditures, share count, order intake and other projections for the year ending December 31, 2013, or any quarter therein, as well as statements relating to the company's long-term prospects, impact of its acquisitions and its strategic plans.

Such forward-looking statements are subject to a number of risks and uncertainties, including, but not limited to, risk that the company will not achieve its expected financial projections and/or that the company will not successfully execute its strategic plans. In each case, due to, among other possibilities, an inability to withstand negative conditions in the global economy or in the markets the company serves, a lack of demand for or market acceptance of the company's products, or failure to successfully execute upon its operating plans. Additional risks and uncertainties faced by the company are contained in the company's filings with the U.S. Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2012, quarterly reports on Form 10-Q and current reports on Form 8-K.

Collectively, these risks and uncertainties could cause the company's actual results to differ materially from those projected in its forward-looking statements, and the company disclaims any intention or obligation to revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I'll now hand the call over to Max.

Scipio Carnecchia

Thank you, Todd. Let me start by providing a review of the first quarter 2013 financial year results. The first quarter results were reasonably in line with our internal targets for revenue and earnings. However, it was a disappointing quarter from an orders perspective, and unfortunately, the shortfall of our orders target will impact results for the balance of the year, requiring us to revise our guidance downward for the full fiscal year 2013. Michael will cover those details shortly.

As we have examined our first quarter performance, several factors contributed to the order shortfall from an execution and macroeconomic standpoint. In our last call, we discussed that our strategy to expand downstream in research and development required us to evolve our organization from a product-centric to a market-centric, thus better aligning with the end market segments we serve. To that end, we focused our teams and go-to-market approach in accordance with the following segments: life science research and development; analytical development quality and manufacturing, ADQM; and material science and engineering.

The life science research and development segment largely includes the historic Accelrys and Symyx product lines, including Discovery Studio and ISIS Isentris, that are focused on a biopharma drug discovery area. Life science analytical development quality and manufacturing, primarily includes the product lines acquired from VelQuest, Aegis Analytical and Vialis along with the Accelrys ELN. And finally, the material science and engineering segment includes product lines focused on industries beyond biopharma and represents new growth opportunities for the company. The Contur ELN is a key product line in this segment.

Each of these market segments has their own business dynamics at play. The life science research and development segment is focused on a market that is experiencing a once in a generation change in the way biopharma conducts new drug discovery and development. Our ADQM segment is in the process of integrating 3 acquisitions and the associated portfolios. And finally, the field organization in the MS&E segment is adjusting to a new coverage model, specifically focused on growing into new industries.

While the move has been disruptive in the first quarter, the transition to segments is yielding results. Our teams are now able to address the market needs more clearly and deliver bundled solutions that focus on the broader, more strategic issues that our customers are interested in solving through software investments. The feedback from key stakeholders, industry analysts, customers and partners is that this change has driven a more effective level of engagement with the market.

However, it has taken some time for our teams to settle into the new structure, especially our sales teams, which moved to a new coverage model. In the first quarter, this impacted both renewals and new business. We fully expect this to settle down over the next few quarters and be behind us as we head into the fourth quarter, our largest in transaction size and volume.

As we mentioned on prior calls, a key part of executing our strategy to optimize the lab to commercialization value chain required that we upgrade our field organization to one that could effectively manage enterprise-scale transactions. We have made important progress in this area, hiring key talent in sales management and at the account manager level, as well as investing in skills training. We did not fill open positions as quickly as we wanted, and the team's overall ramp-up has taken more time than desired, contributing to the execution challenges we experienced. We have more work to do in this area, and it remains a primary focus for management.

Our company strategy has been well received, changing our relationship with customers from a point solution vendor to a strategic enterprise class partner. This has impacted the dynamics of the purchase process, and while this is to be expected at some level, the approval cycles continue to be slower than anticipated. These approvals require multiple high levels of authority, carry slower releases of approved budget and generally have had more frequent delays as compared to transactions of similar size and scope in prior quarters.

And finally, we made 3 important acquisitions in the last 15 months that have enabled the company to expand downstream from early research towards commercialization. These strategic acquisitions have played an exciting role in changing the relationships with our customers and partners that I referred to earlier. However, they have completely have -- are in completely new functional areas and we are still digesting the dynamics of their sales processes and overall market space.

Like other technology firms, we are also experiencing some macroeconomic environment that are not improving. This weakness contributed to all product lines, segments and geographic regions underperforming their targets in the first quarter. While it was a challenging quarter, we advanced the ball in a number of areas of our business that demonstrate our continued progress delivering against our strategy, including, midway through the quarter, we announced the new Accelrys LIMS, which transforms the traditional LIMS market with a unified, process-centric architecture that improves overall product quality, increases operational effectiveness and accelerates innovation.

The Accelrys LIMS is part of the Accelrys process management and compliance suite, bringing together the solutions acquired from VelQuest in combination with the Accelrys ELN and the Accelrys Enterprise Platform. The suite changes the traditional paradigm that other vendors have taken to automate laboratory operations.

In addition, we announced the new integration between Accelrys ELN and the trusted chemistry workflow solution Reaxys from Elsevier. This interoperability provides access to a valued source of chemical information, accelerating cost-effective research and improving outcomes in upstream R&D and downstream process development. In addition, it is a significant example of our vision to provide an open scalable platform that enables our customers to leverage the best science regardless of the source.

And finally, we recently announced our new Accelrys externalized collaboration suite at Bio-IT World, one of the leading conferences for biotech and pharma. The pharmaceutical industry is rapidly moving to a multi-partner research collaborations to improve innovation productivity. However, they are grappling with how to support this from a technical infrastructure perspective. Our cloud-based suite addresses the full range of externalized collaboration needed across all research data, delivering a more holistic strategy for partnering organizations.

This is a strategic focus of investment for Accelrys, targeting the rotation of spend from the current biopharma software footprint, supporting legacy drug discovery approaches, to investments that support this new business model and the future path for drug innovation. We are convinced the market opportunity in front of us is as strong as ever, and the feedback from the industry analysts, customers and partners over the last quarter has only served to reinforce that position.

As we discussed in the last call, early in the first quarter, Accelrys' enterprise and laboratory notebooks were recognized by Gartner in their report on ELNs, with a score of very high or high in each scientific and functional domain. Accelrys was the only vendor that achieved these ratings in all categories. In addition, the new Accelrys LIMS release was featured in a first look from Gartner, where they stated, and I quote, "This is the first time that a lab informatics vendor has developed a process-centric LIMS with automated compliance features." They go on to say, "Traditional LIMS vendors, sample-centric tools have proved to be inflexible and difficult to validate. Manufacturers require process-centric approaches and automated compliance tools for laboratory operations."

This report not only provides positive feedback on the solution and its differentiated position in the market, but also that the report in and of itself acknowledges that the companies movement from point solution vendor to an enterprise-class partner.

In summary, while we are disappointed in our Q1 orders performance, we firmly believe in the market opportunity. We have taken aggressive actions to address the issues that contributed to the order shortfall and our teams are heads down and remain motivated and focused on our annual goals.

The fundamentals of our business are strong,with a healthy balance sheet and strong cash position, which serve as a solid foundation for us to execute our strategy and create value for our shareholders and our customers.

Over nearly 4 years, we've been hard at work, building a competitively differentiated comprehensive suite of offerings and company and we remain convinced of the significant market opportunity available to us.

With that, I'd like to turn the call over to Michael.

Michael A. Piraino

Okay. Thanks, Max. Let's get right into the numbers for the first quarter. On the investor fact sheet, which contains both GAAP and non-GAAP disclosures, can be found on the company's website under the Investor Relations section, along with a full reconciliation of GAAP to non-GAAP results for Q1.

Q1 is an important quarter of the year for orders performance because of its overall contribution to the year and the resulting impact of Q1 orders on annual revenues. Overall, orders including orders for professional services, for the quarter, were down when compared to the same period 1 year ago. All geographies, as well as our strategic and academic accounts, were affected.

You will recall, from our last quarterly call, that for external reporting purposes, we have retired the product family orders reporting. As we said 2 months ago, we have organized our go-to-market and product development activity around the end market segments that Max outlined earlier.

Sales of platform products consisting of the Accelrys Enterprise Platform, Pipeline Pilot and the associated science collection, have been allocated to their respective end market segment. We feel strongly that market segment performance reporting will produce the best measurement of how a particular set of solutions is doing against the end markets it serves.

Orders contribution for Q1 2013, when compared to Q1 2012, is as follows: Life science R&D, representing approximately 54% of orders for the current quarter was down approximately 29% versus the prior year; ADQM, representing approximately 14% of orders for the current quarter was flat versus the prior year; and MS&E representing 32% of orders for the current quarter, was down approximately 6% versus the prior year. The prior year order numbers that were used as the basis for these comparisons have been calculated using allocations since the business was not managed according to market segments during that period. The current year order numbers do represent specific market segment assignment. These year-on-year comparisons should be considered preliminary, as the company is still refining its methodologies for allocation and assignment to the 3 market segments.

Trailing 12-month renewal rates for subscriptions on term life initiatives were 89%, trailing 12-month renewal rates for maintenance averaged approximately 86% and trailing 12-month renewal rates for content were 88%. These results were somewhat below our expectations. There were 5 customers with aggregate orders during the quarter that exceeded $1 million.

Approximate non-GAAP revenue breakout for the quarter by geography was as follows: North America, 51%; EMEA, 28%; and Asia-Pac, 21%. Non-GAAP revenue for the quarter ended March 31, 2013, was $43.9 million compared to $41.8 million in Q1 calendar year 2012, representing an increase of 5%. The Aegis and Vialis contributions to revenue for the quarter were approximately $1.6 million, resulting in an organic non-GAAP revenue increase for the quarter of approximately 1%.

Non-GAAP revenue for the quarter on a constant currency basis was $45.4 million, a direct result of a $1.5 million in unfavorable currency translations coming from Japan. Content revenue for the quarter decreased 28%, as a result of our 2011 restructure, from $3.6 million to its current level of $2.6 million per quarter. Gross margin, as a percentage of non-GAAP revenue, was down 300 basis points. This was, again, the result of higher mix of professional services revenue.

Total non-GAAP operating expenses for Q3 2013 were $27.7 million, versus $26.3 million a year ago or an increase of 5%. Compared to the same period a year ago, sales and marketing expenses were up approximately $1 million, the result of additional quota carriers offset by lower commissions. R&D expenses were up approximately $0.7 million, as a result of the Aegis acquisition and G&A was down approximately $0.4 million, the result of expense management and lower accrued corporate incentives. Non-GAAP operating income was 10.1% versus 13.3% for Q1 2013 and 2012, respectively.

Aegis and Vialis -- I should say the combination of Aegis and Vialis were dilutive to non-GAAP operating income, adjusted EBITDA and non-GAAP earnings per share for the first quarter of 2013. Adjusted EBITDA for Q1 was $6.7 million or 15.2% of non-GAAP revenue compared to $8.1 million or 19.4% of non-GAAP revenue for Q1 of calendar 2012. Non-GAAP earnings per diluted share was $0.06 for Q1 2013 and $0.08 for the comparative period in 2012.

Now looking at the balance sheet. We had total cash, investments and secured notes receivable of $165 million as of March 31, 2013, as compared to $200 million a year ago. That comparison comprehends $40 million -- approximately $40 million for acquisitions, $13 million for stock buyback and $8 million for capital expenditures during those past 12 months.

Depreciation expense was $0.9 million for the current quarter as well as last year. Capital expenditures for the quarter amounted to approximately $2.3 million compared to $0.8 million for the same period a year ago. The increase in Q1 was primarily attributable to our completion of an Oracle R12 upgrade and the construction of our new corporate headquarters in San Diego.

Finally, we'd like to provide our revised guidance and following forward-looking statements, reflecting the company's expectations for calendar year 2013. For the year ending December 31, 2013, we expect non-GAAP revenue to be between $176 million and $181 million. Expect non-GAAP diluted earnings per share to be between $0.32 and $0.34 on a fully diluted weighted average shares outstanding of 57 million and using an effective pro forma tax rate of 40%.

Additional comments, with regard to our revised 2013 guidance is as follows: Aegis and Vialis are expected to be dilutive for the first half of the year, but accretive to non-GAAP earnings per share for the entire year. Aegis and Vialis are expected to contribute in the aggregate approximately $9 million to $10 million in revenue for 2013. We expect revenue and EPS headwind from foreign currency and expect the yen to continue to erode against the dollar for the remainder of the year. We have assumed a median -- bank's median forecast and the guidance ranges account for that continued erosion. The guidance presumes that adjusted EBITDA to be in the range of $33 million to $35 million for the year, and capital expenditures are expected to be approximately $14 million for the year. The buildout of the new corporate headquarters location is the main contributor to this increase.

With that, operator, I think we are prepared to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sung Ji Nam.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

So Michael, going back to your guidance for the year, if you factor in Aegis and Vialis contribution of $9 million to $10 million, you're anticipating organic growth -- or organic growth decline for the year. And given -- understanding that your order growth was weak in the quarter, you've had pretty strong order growth over the last couple of quarters. I'm just curious as to -- if you could potentially breakout kind of the contributing factors, whether how much of it do you expect it to come from your execution in the first quarter versus foreign currency headwind and things like that. That would be great.

Michael A. Piraino

Yes, thank you. Yes, so the revised guidance is clearly reflective of a combination of the order shortfall in the first quarter. When we don't deliver an order on time or in the first quarter, obviously, we don't capture that revenue for virtually the entire part of the year. So it does create some challenges from a revenue perspective. So there is a contributing factor from the order shortfall in the quarter. Obviously, we've re-forecasted orders for the balance of the year, and Max can kind of comment on that activity. But almost of equal importance is the $1.5 million, I think $1.6 million cost us in the first quarter on constant currency. And of course, 99% of that came out of Japan. And unless the Bank of Japan had some success with their stimulus and other programs, trying to move this from a deflationary economy to an inflationary economy, I think that we are going to face some real headwinds there. So I guess your overall comment about organic growth, I mean, I think, even with this guidance range, we would have expected organic growth without the FX headwind. But that's several million dollars and I think that does create a challenge for us.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Okay. And with regards to your content business, the decline in the quarter is kind of, percentage-wise, same magnitude as last year, if you look at it on a year-over-year basis. And I was kind of curious as to, are you seeing accelerated declines there in that particular segment?

Scipio Carnecchia

Yes, Sung Ji, this is Max. So I think we have to be a little bit careful here trying to take a single data point about any given product or any given geography. Based on the analysis we did, the original question you had, a portion of that was impacted by the economic headwinds and the macro situation in the currency and all that. But more than half of it was our own execution, and that execution was primarily impacted by all the change that we instituted going into January, going into 2013, moving to the market segments, instituting that in our coverage model, continuing to digest the integration of the acquisitions we've done, VelQuest, Aegis, Vialis and just trying to spin all of that up simultaneously. The content business is a business that we've restructured. And obviously, we're disappointed in how it performed in Q1, but we're also being -- we're trying to be judicious on how to read those tea leaves because it's a single data point in the midst of a lot of other things that were being changed.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Okay. And then lastly, you mentioned that you were taking some aggressive action going forward and was wondering kind of if you could provide some specifics as to what you mean by that.

Scipio Carnecchia

Sure. So trying to get through a learning curve or kind of going through that spin up and that maturation process faster, we've tried to accelerate some of the things relative to our hiring, upgrading some of the positions, both in our sales leadership as well as some of the open account manager positions that we've had, ensuring that the product roadmap and the investments that we've made are going to yield the products on time according to the roadmap that we have, really ensuring that the pipeline and lead generation and demand generation programs that we've had in place are not only executing, but are being followed up on to ensure that we're maturing that pipeline that's growing so that it does yield the results from formal orders. Those would just be a couple that I would touch on. There's probably close to over a dozen.

Operator

Our next question comes from the line of Chad Bennett.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So I guess I'm just trying to understand the changes that were made during the quarter. What -- I guess, renewal rates, you indicated we're a bit lower than expectations, but they didn't look disastrous by any means. So I'm just trying to think, if someone came in, as much as you can give me a block and the tackling, someone came in to renew a Discovery Studio maintenance agreement, I mean, was the sales guy not incentivized to do that? I mean, what changed so dramatically to get those types of order numbers there or lack thereof?

Scipio Carnecchia

Yes. Well, I think -- Chad, it's Max. You've got a combination of impacts here that's both renewals as well as the new business -- obviously, that's a big part of a cultural shift for us, being more focused on the new business. But as the prepared remarks for me, as well as Michael, it was -- we were impacting orders on both sides. To use the example, you were just after there with renewals, if I re-swizzle the coverage model and I'm dropping somebody into a circumstance where they've got either a new territory, or new account relationship, they were responsible for something like renewals where before they have the entire portfolio both for new and renewals and they're grabbing hold of those things late, if we haven't been on the customers radar, if we haven't been doing it programmatically, that could end up in that not being captured in the period and something like that falling over into the next period or a later period to be recaptured from a renewal perspective. Some of these things also aren't as easy as just kind of sending out an invoice and kind of doing billing and collection. And particularly in some of the markets that have been more challenged, like the life science academic market, if you're not really right on top of that stuff, the academic community may not have the funds, they may not have received the grants, which is only compounded by some of austerity measures from some of the governments around the world. That would be a little color that I'd try to give you on that.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So do we feel like we have the talent base on the sales side to move to this more solution approach from a point approach? Or is there more work to be done there?

Scipio Carnecchia

I think to be reasonable, we've made a lot of progress. We've made a lot of changes to our field leadership. We've done a lot of training. We've upgraded a number of the field account management positions, kind of weeding out the underperformers. But I still believe there's more to be done there, both with the people who've come on board, there's just a -- there's a certain burn-in time, there's a certain spin-up time. That doesn't happen instantaneously. And over the course of Q1, Q2 and into Q3, we're going to continue to mature up that curve. And some of those aggressive action plans that Sung Ji was asking about, really comes back to how do we accelerate that? How do we ensure that we're successful in doing that?

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So for example, last year, when we spoke about professional service growth, which was significant last year and how we're laying the groundwork in terms of proof of concepts for -- at the start of the year Pipeline Pilot then the Enterprise Platform. So what's the status of those? And do the sales -- have the sales changes impacted that shift from proof of concept to actual license revenue?

Scipio Carnecchia

Well, I think, first, the overarching framework that services would lead license sales, I think is still intact. We're watching -- we continue to see significant proof of concepts and pilots being stood up to ensure that the products meet the -- the solution meets the requirement of the customer, where they're prepared to pay us some nominal amount for services, make a commitment for services, to get through that proof point, to get through that validation step before making a significant commitment on the license side. Having said that, kind of coming back to some of the prepared remarks in Q1, with the changes we -- plus some of the headwinds, I think things that we were counting on, or things that we were anticipating in our pipeline, that would be closed by the end of March, didn't come together by the end of March. And that doesn't mean we lost them, it just means that they've slipped in some of the things that slipped into Q2 have already been recaptured. But I keep coming back to -- you just got a lot of change that we've instituted through the January, February time frame and it's going to take some time to get all that digested.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay, last one for me...

Michael A. Piraino

Chad, this is Michael. I just have a couple of quick follow-ups to that. One is, with respect to a renewal as it moves out of the period, if we're successful at recapturing or capturing that renewal, you really don't lose anything from a revenue perspective, right, you can kind of go back to the anniversary date or whatever. So you don't typically have a gap unless the negotiation proves that it would require some type of a discount. But you kind of connect the revenue there. So that's one point of clarity. I think the other thing is, we've talked a lot about it, is to whether or not moving to the market segments, #1, was the right thing. And in the first quarter, was it the right time? And we still -- and Max should comment on this, but we think that this was a move that needed to be made. It was the right time to do it. And there was going to be a disruption whether we did it in Q1, Q2, Q3 or Q4, but this was the right time, because it was built around our worldwide kick-offs and so on and you want to get that momentum coming out of the gate at the beginning of the year.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Yes, I hear you. Last one for me, probably for Michael. How much did FX impact deferred revenue?

Michael A. Piraino

I tell you, I don't have that number off the top of my head. But I can tell you that the currency movement in the quarter was 10% or 12%. So I don't have deferred revenues in front of me broken out by group, but it's probably not crazy to assume that the components of deferred from a geographical perspective aren't all that different from revenue, right?

Scipio Carnecchia

Mirror revenue, right? Yes?

Michael A. Piraino

Yes. Pretty much, pretty much. I mean they may have a little less services, but think of it as 20% and then you can kind of do your calculations on the currency movement from there.

Operator

Our next question comes from the line of Scott Berg.

Scott R. Berg - Northland Capital Markets, Research Division

A couple of questions here. First of all, from a housekeeping perspective, with the new metrics that were given this quarter, the percent of orders, is that a -- I guess, an absolute number on the number of orders? Or the cumulative revenue related to those orders between the periods compared?

Michael A. Piraino

No, it's only the first quarter, because we just launched it in the quarter. And it's what that -- those orders contributed in total.

Scott R. Berg - Northland Capital Markets, Research Division

Okay, got it. And then on the order performance being weak in the quarter, can you help quantify, maybe, from a, I don't know, percentage or general color, how many of those deals were just simply pushed out to future quarters whether it's second quarter or maybe the third quarter, versus how many were actually lost, given some of the macro issues that you're currently seeing?

Scipio Carnecchia

Yes, so this is Max. Without giving you a 2 decimal point number, the overwhelming majority were things that slipped out of the quarter, as opposed to blew up lost or customers no longer have budget for.

Scott R. Berg - Northland Capital Markets, Research Division

Great. And I guess the last question is, I guess on the -- pardon me, on the longer sales cycles, Max, that you had talked about. Is there a way to, I guess, quantify how much of the longer sales cycles was macro-related versus the change in the sales force? Obviously, the change in the sales force was very impactful to the quarter, but you highlighted kind of several different items that overall just impacted longer sales cycles. I'm just trying to get an understanding, maybe what the mix was that impacted that.

Scipio Carnecchia

Yes. So I think we wanted to make sure that we were being clear that the market conditions, the macroeconomic environment, the FX were an impact here while at the same time being clear that the execution issues associated with all the changes that we've instituted was probably more of the factor than those macro issues. Trying to quantify it, I don't know, Michael, if you want to take a run at that one. Is it 75-25?

Michael A. Piraino

Yes, that's probably a fair estimate.

Operator

Our next question comes from the line of Kevin Liu.

Kevin Liu - B. Riley Caris, Research Division

Just a quick follow-up on the currency impact. I thought I heard a mention of $1 million impact on the revenue line and then $1.6 million, wasn't sure if that was orders or something else. So if you could clarify that first.

Michael A. Piraino

Yes, it was $1.6 million on the revenue line.

Kevin Liu - B. Riley Caris, Research Division

Okay, got it. And I would imagine that we have the breakout of Asia-Pac as a percentage of total orders. But I would assume Q1 orders tend to be heavily skewed to your Japanese customers. So I was curious, in a typical Q1, what percentage of your orders are coming in from Japan?

Michael A. Piraino

Yes, we don't actually break that out, Kevin. Over the year, they typically do -- they are representative of the revenue breakdown that we provide there, but it's no secret that Q1 is a very busy quarter for Japanese accounts because it's their fiscal year end.

Kevin Liu - B. Riley Caris, Research Division

Yes. I mean, maybe asked another way, is there any way you could kind of quantify what the orders growth look like on a constant currency basis, by those various product segments?

Michael A. Piraino

I don't have that in front of me, sorry.

Kevin Liu - B. Riley Caris, Research Division

All right. And then, I guess one of the things I'm -- certainly, you're realigning some of the way you report the different product families, but at the end of the day, the solutions that are being sold are still the same. I would imagine most of these were in the pipeline coming into the quarter. So why all of a sudden is there this big disruption that happens?

Scipio Carnecchia

Well, I think, first, not all of the solutions are in the pipeline. If you kind of remember, over the course of the last 15 months, we've added, particularly in the ADQM segment, we've added a significant number of inorganic elements, Aegis, Vialis, VelQuest. On the MS&E segment, we've introduced VKB as a product, which was an organic product and we've been slowly spinning that up. I think when you combine that within reshuffling territory assignments, account assignments, what you're asking people to do to get more focused on these segments, it can be disruptive. And let's also keep in mind, when we talk about the macroeconomic situation, it's not as easy. It's not just things like a headwind economically or a foreign exchange currency stuff. You've got many customers that didn't finalize their own budgets until well into the quarter itself. And I think whether it's Accelrys or other technology, other software companies, the end of March for spinning up a lot of new business is typically not the buying season for those customers. So just to put a little color on it for you.

Kevin Liu - B. Riley Caris, Research Division

All right. And I know we've kind of tried to dissect orders a bunch of different ways here, but if you were to just look at kind of orders that you were expecting that were more tied to renewals versus new business, any sense for what that breakout looks like?

Scipio Carnecchia

Kevin, you mean as far as what was in the gun sight from the forecast and what's slipped out of the quarter, looking through it as a renewal versus new business lines?

Kevin Liu - B. Riley Caris, Research Division

Correct. I mean, certainly, you guys have your internal forecast for orders. You've talked about maybe some execution and shortfall issues there. So just curious, how much of it is renewals, which could very well come in, in Q2 or maybe Q3 here versus a new set that might be a little bit more uncertain.

Scipio Carnecchia

Yes. Well, the new business was -- the majority of it, I don't know, Michael, if you want to try, I don't have those numbers in front of me to quantify it. I want to say like 1/3 renewals and 2/3 was new business.

Michael A. Piraino

Yes, that's about right. In any particular quarter, that's about the right ratio.

Kevin Liu - B. Riley Caris, Research Division

Okay, that's helpful. And then just lastly, you just talked right now about a lot of different new products being introduced to your sales force. You guys have been pretty acquisitive of late. Just wondering if there's been any sort of change in your thinking on how aggressive you want to be on the M&A front, versus other potential uses for your cash?

Scipio Carnecchia

Well, I think that the acquisition -- the overarching strategy of the business is the right strategy. Instituting that to your market segments, as Michael referred to, is the right approach to get that stood up and be very market-centric and then turning that into your field and sales coverage model. As I've done the analysis and think about what happened in Q1, market segments is the right approach and instituting it in January was the right time to do it. From an acquisition perspective, acquisitions are a part of that strategy. And to accelerate the strategy, you don't always get to choose when an acquisition is available. There's an opportunistic nature of that. So we're doing a lot of digesting in that ADQM segment relative to those -- the acquisitions we've already talked about. I'd like to see us get through that before we took on anything significant, while at the same time reserving the right to do it, because if something comes up and it's available and it may be competitive, we'll find a way to get through it.

Operator

Our next question comes from the line of Greg McDowell.

Greg McDowell - JMP Securities LLC, Research Division

My first question, I just wanted to ask about the lower revenue guidance and maybe if you could help us parse out how much of it is related strictly to Q1 order performance versus just assuming maybe it's in a more conservative close rates in your pipeline versus the macro, and just maybe how you just thought about the amount by which you were going to lower the pipeline, whether it was all Q1-related, or just scrubbing that pipeline post Q1 performance?

Scipio Carnecchia

Michael...

Michael A. Piraino

You want me to take that Max?

Scipio Carnecchia

Yes, I was going to say -- Greg, I'm sorry, we're not in the same room together. So it's hard to see who's going to speak first here. From a guidance perspective, I think you want to look at that as the approach we're taking, the risk adjusted approach we're taking to what we believe is going to happen in the balance of the year, and that takes into consideration the macro headwind. It takes into consideration the Q1 performance, it takes into consideration a very bottoms up, very granular transaction by transaction review of what we're anticipating happening in Q2, Q3 and Q4, an analysis of our pipeline, how it's maturing and of course, the FX bits that Michael has spoken to. I don't think we're going to dissect it anymore than just let you know that all of those things are considered in the adjustment relative to forecast and then how that translates into the guidance.

Michael A. Piraino

Yes, I think that's a fair comment, although there are some clues there, Greg, in the, of course, in the material, right? I mean, at the top end of the range of the guidance that was out there prior to today's call was 190 and we've moved it to 181, so call that a $9 million delta. We had $1.5 million FX impact on revenue in just the first quarter. Now you're probably better than we are at making predictions about where the U.S. dollar and yen pair is going to go to the balance of the year. But we've assumed that it's going to continue to erode. So there's certainly a -- again, without breaking out, without parsing and using your word, the $9 million, that this much was orders and this much was FX. There's a significant component of FX in there.

Greg McDowell - JMP Securities LLC, Research Division

That's fair. And I don't think I'm any better at forecasting currency movements than you guys are. But I guess, maybe one more question for you, Max, and just as you sort of peel the onion on Q1 and the business. Maybe a bigger picture question is if what's going on right now has shaken your faith at all in the market opportunity and what you guys have in front of you and just how you're thinking about it.

Scipio Carnecchia

Well, so of course we want to get introspective and we want to be thoughtful and we did a very deep dive to kind of get to the bottom of root cause performance whether it was the things that are within our control execution-wise, or whether it was the external things we've talked about. The opportunity in the scientific software field is significant. And that is reinforced, it's reinforced when I sit with customers over the last 2, 3, 4 months and our ability to have a different kind of discussion, have a different kind of relationship, a more strategic, not just dialogue, but relationship with these customers. Having said that, obviously, the results for Q1 were not what we were working towards and weren't what we had planned for. But it has not changed my perspective on the opportunity and how we are positioned to take advantage of it and exploit it.

Operator

Our next question comes from the line of Matthew Kempler.

Matthew J. Kempler - Sidoti & Company, LLC

So I mean it sounds like there's a move to a more strategic approach, and these changes are going to take a couple of quarters to work through. From your view, do you think Accelrys will return to order growth in this calendar year or could it take a little bit longer?

Scipio Carnecchia

So this is Max. When I think about the orders, certainly, on a quarter-over-quarter basis, I believe we can get to order growth. I don't have the numbers in front of me, you can see what that pencils out to -- Michael maybe you do, or whether we want to share that.

Michael A. Piraino

Well, I don't think quantitatively, we do. But I think underlying the basic assumption on orders and revenue conversion, there is an assumption of order growth there. And I don't think we should discuss it in the context of this quarter or that quarter, but I think that is the assumption.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then just going back to the pilot activity as a leading indicator. Can you give us a sense of what's going on with the level of activity? And we had pilots get turned off or extended or just come back with kind of no result?

Scipio Carnecchia

Yes. Without trying to be over-egging this or trying to be more specific than would be appropriate, if there were -- for every 3 pilots that we felt we had a gun sight on and we're going to knock down in Q1, we probably ended up with one of them converting. The other 2 and there aren't just 3, I'm using 1 out of 3 as the ratio. The other 2 are completely still in play.

Matthew J. Kempler - Sidoti & Company, LLC

And when a pilot's in play, are they still in pilot mode? Or the pilot ends and now you're in negotiations. I guess, how does that work?

Scipio Carnecchia

It's not always -- there's not a one-size-fits-all. Sometimes you have to take the toys away from the customer, so that they can force themselves to get through that contractual cycle. Sometimes everybody's playing real good and every -- all the coordination and all the progress is being made, and you can let the pilot continue to run as almost the phase 0 implementation while you're working through the balance of the statement of the work to convert it into a production environment and all of the contractual issues associated with the licenses.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then the MS&E segment, are the same issues affecting that? Because I feel like that might not have gone through exactly -- as drastic a shift as what happened in life sciences? I'm just wondering, are you seeing the same issues? Or something else going on there?

Scipio Carnecchia

No. I think that there's similar issues, but we had a little bit of a head start on MS&E because we did snap the non-life science things from life science from a field organization perspective. We weren't looking at it necessarily as a market segment when we did this last year, but we did start to build territories of concentration, life science versus non-life science. And that was the basis for how we now clicked over to MS&E. So I think it was less affected only because we had a little bit more of a running start there, with the field organization.

Operator

And there are no further questions in queue at this time. I'll turn the call back over to the presenters.

Todd Kehrli

Max, you want to close out?

Scipio Carnecchia

Yes. I want to first thank everybody for their time and attention. Against one of the questions that we just ended here, there's a significant opportunity in the markets that we serve. And certainly, we're not delighted with how we performed from an orders perspective in Q1.

I also would like to make sure that it's balanced here. We made a lot of progress, whether that was in the product portfolio, whether that was the transition to market segments. And we're very enthusiastic. We're very bullish about our ability to take advantage of this opportunity.

So with that, we'll bring the call to a close.

Todd Kehrli

Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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