Symyx Technologies, Inc. Q2 2009 Earnings Call Transcript

Jul.29.09 | About: Symyx Technologies (SMMX)

Symyx Technologies, Inc. (SMMX) Q2 2009 Earnings Call Transcript July 29, 2009 5:00 PM ET

Executives

Isy Goldwasser – CEO

Rex Jackson – EVP and CFO

Analysts

Dan Leonard – First Analysis

Operator

Good afternoon and thank you for joining us to discuss Symyx Technologies Second Quarter 2009 Results. Joining me on the call today are Isy Goldwasser, Chief Executive Officer and Rex Jackson, Chief Financial Officer.

Before we begin, please note that management will make forward-looking statements in this call based on the environment as management sees it today and that these statements thus involve risks and uncertainties. You should refer to the company’s press release and the SEC filings referenced there for information on risks and uncertainties that could cause actual results to differ materially from the results forecasted today. The company expressly disclaims any obligation to update or revise information contained in these forward-looking statements, except as required by law.

An archived 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 two weeks by dialing 888-203-1112 for the U.S. and Canada and 719-457-0820 for international callers. Reservation number is 5364540.

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

Isy Goldwasser

Thank you. Good afternoon, everyone and thank you for joining today's call. Today, I'm going to review Symyx's second quarter results and provide summary updates for our business units, Symyx Software and Symyx HPR. Rex is then going to detail our financial results for the quarter, provide a business outlook to the third quarter and to full year 2009. Then I'll close with few comments on our expectations for the remaining of 2009 before opening it up for questions.

Let's begin turning first to the results of the quarter, revenue for the second quarter came in slightly above the high end of expected range of $33 million and $36 million. Our non-GAAP net income for the quarter also exceeded the expected range and Symyx delivered a solid performance with respect to cash by improving its cash balance approximately $85 million.

Through the first half of 2009, we have lowered operating expenses by more than $20 million or 28% versus last year's first half as a result of our restructuring in Q4 of 2008 and our continuing efforts to reduce operating expenses.

Despite the challenging economic environment, we improved the bottom line and maintained a strong balance sheet in the first half of the year. These results are directly attributable to our organization's overall ability to adapt and execute during the first half of the year.

Turning to our business unit results, Symyx Software revenue decreased 14% year-over-year due to lower consulting service revenue and somewhat lower content subscription and licensing activity. Customers have been curtailing or delaying special projects due to the economic environment and that impacted consulting service revenue. Despite the revenue decreasing in the first half of 2009, we continue to expect Symyx Software will deliver a double-digit operating margin this year.

Bookings for Symyx Software were healthy in the second quarter and the month of July. Lead by growing sales of Symyx Notebook, Symyx Software achieved its booking targets and secured two additional top 15 pharmaceutical companies as enterprise notebook clients during this period. These two companies are expected to deploy almost 3,000 Symyx Notebook users over time.

During the past nine months, we have secured five of the top 15 pharmaceutical corporations as enterprise notebook customers and we continue to be encouraged by the progression of our pipeline, pilot program activities, and bookings for our analytical chemistry and biology segments. These are on our backlog to date and forecasted second half renewals and bookings. We expect Symyx Software will be positioned well for a stronger 2010.

Equally important, execution against an exciting and aggressive technology roadmap continues on schedule across our portfolio with key additional releases in Notebook, Isentris, LIMS, and DiscoveryGate expected in 2009. With our current products those planned for release, we believe Symyx Software will continue to perform well with its long-term growth profile and (inaudible) visibility.

The advantages seen in the second quarter are part of a bigger cross-industry shift converting paper-based information tracking to electronic means to improve collection analysis and accessibility of laboratory data. Symyx Software is well positioned to take advantage of these trends within R&D. In fact, Health Industry Insights, an IDC company named Symyx one of the top 10 life science software vendors during the quarter.

(inaudible) our comprehensive product set including ELN, electronic lab notebooks, data acquisition, Decision Support software and scientific databases, which are used by scientists to efficiently access personal data, corporate data, and public sources of data, driving information-driven R&D.

Turning now to our Symyx HPR business unit, total revenue for our HPR business was down 4% for the same period one year ago due to lower research services revenue. The decrease was primarily driven by the conclusion of our alliance partnership with ExxonMobil in May of 2008.

Tools revenue of $7.6 million was up year-over-year due to timing of tool deliveries. We continue to see general market weakness in the area of major capital purchases, but selective opportunities do remain in the market. We are pleased that Symyx HPR has more than 85% of its 2009 plan committed.

We are now focused on two large tool deliveries in the fourth quarter and keep looking during the second half of the year, which are important to meet our goals this year and necessary to building a solid 2010 backlog for the business. In this business, we continue to take the necessary steps to carefully align HPR's resources toward market trends that are in line with our margin and profitability goals.

Within HPR today, we apply our expertise and technology to assist our customers in conducting experiments faster and more economically. Last week, our Symyx Screening Pressure Reactor, a high-throughput system for accelerating catalyst screening and optimization was recognized as a Top Innovation for 2009 by an independent judging panel and the editors of R&D Magazine. This independent endorsement underscores our market reputation as a technology leader in helping companies to maximize the impact of their R&D operations.

In summary, although business conditions were difficult during the quarter, we are pleased with our top line and bottom line results and continue to drive towards our financial objectives for 2009, including positive cash flow for the year and 10% EBITDA.

I'll now turn the call over to Rex to detail second quarter financial performance and provide our outlook for the third quarter and full year 2009. Rex?

Rex Jackson

Thank you, Isy. Today, I will review our second quarter GAAP and non-GAAP results and our outlook for Q3 and full year 2009.

As a reminder, we reconciled non-GAAP financial measures in the exhibits to our earnings release. Also, on our website at www.symyx.com, we have provided non-GAAP operating results for our business units. Non-GAAP EPS excludes amortization of intangibles and other acquisition related items, as well as non-recurring items such as impairments and restructuring expenses, but includes stock-based compensation. Our EBITDA calculations exclude interest, taxes, depreciation, amortization, stock-based compensation, and non-recurring items.

While the economic environment continues to be challenging, revenue of $36.6 million for the second quarter came in slightly above our estimate of $32 million to $36 million. Non-GAAP EPS of $0.03 per share was also better than anticipated, which reflects our success in holding operating expenses consistent with Q1 and a slightly higher revenue.

For comparison, revenue for the second quarter of 2008 was $40.7 million with non-GAAP earnings of $0.02 per share. Software revenue for Q2 was $20.8 million, down 14% from $24.1 million for the same period a year ago. Consulting services were down 61% or $2.2 million while content, license fees, and royalties revenues were down collectively $1.7 million. Maintenance increased by 8%.

Symyx Software contributed non-GAAP operating income of $0.8 million or 4% of software revenue, down from $2 million or 9% of sales in the first quarter of 2009 due to reduced revenue.

From a bookings perspective, software bookings for the first half of 2009 were approximately 50% higher than the first half of 2008. Furthermore, as Isy mentioned, in Q2 we closed a major ELN agreement with our fourth top 15 pharmaceutical company and last week closed a large ELN agreement with the fifth company on that list. We have good pipeline and pilot activity and believe this platform should be a long-term growth driver for Symyx Software.

Looking forward, while we expect Symyx Software revenue to improve in the second half of 2009, 2009 software revenue will be down versus 2008. Lower 2009 revenue, particularly in consulting services, are in part the result of external conditions as customers are delaying new projects or reduce staff.

More significantly however, we see a stronger 2010 because the revenue associated with significant portions of our ELN and consulting services book to date will be recognized in 2010 and beyond due to rollout schedules and additional deliverables.

Total HPR revenue for the second quarter was $15.9 million, down from $16.6 million for the same period a year ago. Research services and royalties comprised $8.3 million of Q2 '09 revenue, down from $10 million for Q2 of 2008, primarily due to the expiration of our ExxonMobil alliance agreement in May of last year.

Tools revenue was $7.6 million compared to $6.5 million for the same period a year ago. The increase reflects a tools sale originally scheduled for Q3 of this year that we shipped in Q2. Accordingly, HPR tools revenue in Q3 is expected to be lower than Q2. Symyx HPR contributed non-GAAP operating income of $0.2 million or 2% of sales, a significant improvement over the first quarter's $2.1 million loss, driven by higher revenue.

Moving on to customers, Dow, our largest customer contributed second quarter revenue of $6 million, down from $6.6 million for the second quarter of 2008. ExxonMobil, our second largest customer, contributed revenue of $3.5 million in Q2, as expected, down significantly from $6.2 million for the second quarter of last year. Our next four largest customers for the quarter collectively contributed $7 million. By business unit, non-alliance customers accounted for 91% of Symyx Software revenue for the quarter and 51% of HPR revenue.

Turning now to margins and expenses, gross margin for the second quarter was 66%, down from 74% in the second quarter of 2008, reflecting primarily incremental expenses and cost of service from our new HPR formulations or CDMO business and the continuing shift of certain R&D expenses to cost of goods sold on our new research services engagements.

Operating expenses for the second quarter were $26.2 million, down $9.3 million from $35.5 million for the second quarter of 2008. For the six months ended June 30, 2009, operating expenses were $52.5 million, a decrease of $20.4 million or 28% compared with $72.9 million for the first half of last year. This decrease reflects the benefits of our restructuring during the fourth quarter of 2008 and our continued efforts to control operating expenses.

GAAP net loss for the quarter was $1.2 million or a loss of $0.04 per share compared with a net loss of $4.5 million or $0.05 per share for Q2 of '08. Non-GAAP net income for the second quarter was $1 million or $0.03 per share compared with non-GAAP net income of $538,000 or $0.02 per share for the second quarter of 2008 as our operating expense control efforts offset the effects of reduced revenue.

Now turning to cash, cash and cash equivalents at June 30, 2009 were $84.9 million, up $18.5 million from $66.4 million in December 31, 2008 and up $3.1 million from $81.8 million at March 31, 2009. We continue to see 2009 as a positive cash flow year. CapEx in Q2 was $2.1 million, primarily to support work flow development in our CDMO business. We are on track to be relatively consistent with 2008 capital expenditures, the target of $7.5 million versus $6.6 million last year.

Now, let me turn to our outlook. Through continued focus on solid execution and operating profitability, we believe we will deliver on our financial goals for the second half of 2009. It is important to note however that the economic environment continues to impact our visibility and as Isy pointed out, we must successfully ship two large tools totaling approximately $8.7 million that are contracted and due for completion in Q4.

For Q3, we currently expect revenue in the range of $33 million to $37 million. Non-GAAP EPS for Q3 is expected in the range of a loss of $0.01 to diluted earnings of $0.03 per share, which reflects our view to continue in the Q3 the expense improvements demonstrated in the first half of the year.

For fiscal 2009, we continue to project revenue of $145 million to $155 million. However, we are raising our prior full-year non-GAAP EPS expectations from a range of breakeven to $0.10 to a range of $0.08 to $0.16 per share, reflecting operating expense improvement.

For Q2 of 2009, EBITDA was $3.6 million or 10% of quarterly revenue, in line with our full year goal. At our guidance ranges, we would expect to achieve our EBITDA target for the year. Our estimated tax rate for Q3 and for the full year 2009 is a benefit rate of 29%.

Thank you. And now, I'll turn it back to Isy for closing comments.

Isy Goldwasser

Thank you, Rex. So in summary, although business conditions were difficult during the quarter, we are pleased with our top line and bottom line results and continue to drive towards our financial objectives for the year. We are committed to our 10% EBITDA (inaudible) for the year and we are very pleased that we are well positioned in the markets we serve with greater operating efficiencies and a solid balance sheet and operational foundation.

We believe and we expect to continue to deliver improving financial results going forward. Thank you. Now, let me open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question will come from Dan Leonard with First Analysis.

Dan Leonard – First Analysis

Hi, good afternoon.

Rex Jackson

Hi, Dan.

Isy Goldwasser

Hi, Dan.

Dan Leonard – First Analysis

Isy and Rex, you didn’t change your revenue guidance for the full year, but I'm wondering given the weakness in software and at least the relative strength in HPR versus the first quarter, has your expectation on the mix of that revenue changed at all?

Isy Goldwasser

Can you take that, Rex?

Rex Jackson

Sure. Not markedly. Our internal assumptions have been that the HPR would be around the high 50s to 60s for the year with the balance being software and that's still consistent.

Dan Leonard – First Analysis

Okay.

Rex Jackson

With obviously, variability on the upside and downside a little bit, hence the $10 million range for the combined company.

Dan Leonard – First Analysis

Sure. And Rex, what was the tool sales in the first quarter?

Rex Jackson

Products for Q1 was – give me one second.

Dan Leonard – First Analysis

Just the product and the tools number, right?

Rex Jackson

Yes, there is a services component.

Dan Leonard – First Analysis

That's something to the $7.6 million you reported in the second quarter on a sequential basis?

Rex Jackson

Yes, give me two seconds. $4.5 million.

Dan Leonard – First Analysis

Okay.

Rex Jackson

Yes, that's right.

Dan Leonard – First Analysis

Okay. So a lot of the sequential increase in the tools performance was due to the – and – I'm sorry – and the HPR performance is due to that tools shipment?

Rex Jackson

Well, there is about $1.5 million of it was the delta. The balance was just a slightly stronger quarter. Then there was a little bit of an uptick in – on the research side as well.

Dan Leonard – First Analysis

Okay. In your EPS guidance for the second half of 2009, if I use the midpoint of your prior guidance, the second half EPS guidance is unchanged. Is this a signal that the expense controls exerted in Q2 aren’t sustainable or were there any surprises on the expense side in Q2?

Rex Jackson

I would say the only – I wouldn’t say it was a surprise; we did not commit last call to hold expenses consistent with Q1. Obviously we were able to do that in Q2. Now we feel comfortable that we can perpetuate that through the balance of the year. So the guidance range reflects that that’s our intent.

Dan Leonard – First Analysis

Okay. And then finally, a question for you, Isy. There was recently a LIMS deal shopped and I’m sure you guys looked at it and passed. So could you help me understand how you view the LIMS business?

Isy Goldwasser

Sure. LIMS business is a very material area with many vendors. There are really I would say handful of very strong providers. Many of them are parts of larger companies and I would say there is a private company that's doing extremely well named LabWare doing quite well. They are probably the best performers in that sector. But we really look at companies – LIMS certainly fits with our portfolio in a broad sense, but it's an area that we would only enter if we had a distinct competitive advantage given the maturity of the area and how crowded it is.

Dan Leonard – First Analysis

Okay. Thank you, both.

Rex Jackson

Thanks, Dan.

Operator

(Operator instructions) And we have no questions at this time and I'll turn it back over to you for any closing remarks.

Isy Goldwasser

Thank you. We appreciate the opportunity to report the results and we look forward to talking to you next quarter with further progress. Thank you, operator.

Operator

Thank you. That concludes today's conference. Thank you for your participation.

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