Symyx Technologies, Inc. (SMMX) Q3 2009 Earnings Call Transcript October 28, 2009 5:00 PM ET
Isy Goldwasser – CEO
Rex Jackson – EVP and CFO
Good afternoon and thank you for joining us to discuss Symyx Technologies third 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 involving 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 3462618.
I’ll now turn the call over to Isy Goldwasser, Symyx’s Chief Executive Officer.
Thank you, Marisa. Good afternoon, everyone and thank you for joining today's call. Today, I'm going to review Symyx's third quarter results, provide updates for our business units, Symyx Software and Symyx’s High Productivity Research, and describe certain plan changes to our organization as we finish our operations for 2010. Rex will then detail our financial results from the quarter and provide a business outlook for the fourth quarter and full year 2009. As part of my closing comments, we will then open up the call up for questions.
Looking first at third quarter results, revenue of $35 million came in at the mid-point of our expected range and non-GAAP EPS of $0.05 exceeded the range. As our costs has been action to continue to improve bottom line results. We are profitable year-to-date on a non-GAAP basis, and on track to reach our stated goal of 10% adjusted EBITDA for the year.
Symyx Software revenue decreased 14% year-over-year due to lower licensing, consulting services and content subscription revenue partially offset by increased maintenance revenue. In licensing and consulting services we are being impacted generally by market conditions, and more specifically, as a fact that revenues from some of our larger enterprise electronic lab notebook or ELN bookings over the past nine months are generally tied to release and customer rollout schedules, and those coming overtime were backend loaded.
In contest, we have seen a pullback due to customer’s efforts to cut costs and through other market pressures. From an operation’s perspectives, we continue to execute well in the product development area. During the quarter, we launched Symyx Notebook 6.3, a major version upgrade. Notebook 6.3 strengthened by adding parallel chemistry support for synthetic and medicinal chemistry and marks another step forward to establish Symyx Notebook as the leading ELN platform in the industry.
More recently, we announced introduction of our hosted informatics conference to be accessed via a software-as-a-service business model. With the initial launch of Symyx notebook as a host ELN, the host delivery model provides customers of lower total of cost of ownership and faster deployments, leveraging our operational experience with our DiscoveryGate content platform.
Smaller pharmaceutical biotechnology and contract research organizations now have an option to access the productivity and collaboration benefits of an ELN without the added version of IT infrastructure and resources.
During the quarter, we also announced to release of Isentris 3.2, which enable scientists to explore, compare and report on information spanning multiple experiments captured in ELN and in laboratory information management systems.
Isentris 3.2 include integration with our Symyx LEA software suite and supports our collaboration with Thermo Fisher Scientific to provide integration with impairments Thermo LIMS [ph] products.
Finally on developments, starting in Q3 with regarding expansion of our global software development operations, the opening of a new R&D center in Bangalore, India through a partnership with Encora, a leader in collaborative software product development services. We also strengthened our software operations in Europe with key personnel in addition to consulting services, presales in sales and consolidate our U.K. operations.
From sales perspective, I am pleased to report that another top five pharmaceutical company made a multi-million dollar commitment to our notebook solution in the third quarter as part of our multi-year deployment across the enterprise. This is the latest of several deals we signed with tier 1 pharmaceutical companies that further demonstrates our strength of our enterprise ELN platform.
While we expect Symyx software revenue in 2009 will be down relative to 2008. We are pleased with our progress in product and platform development, our bookings in a tough environment, particularly in ELN and a margin cash contributions for this business even as we continue to invest heavily in R&D.
Now, I'll review results for HPR business unit and detail the steps we are taking to improve its performance. Both third quarter revenues for HPR of $13 million was down 3% from the third quarter of last year. Due principally our lower product revenue, HPR products and laboratory systems or tools used by R&D organizations to execute 10 to 100 times one lab experiment and does to Excel or Innovation. HPR product revenues continue to be seasonal with Q4 typically the largest shipments during the year.
As a reminder, we anticipate two large product deliveries in the Q4 totaling approximately $8.7 million that are essential to meeting our 2009 goals in HPR. These two deliveries continue to proceed on track.
Overall, we are pleased with the progress [ph] of HPR products this year. Further, during the past month, the business has increased its 2010 backlog over $11 million from several bookings the largest a commitment from China Petroleum & Chemical Corporation [ph] otherwise called Sinopec [ph] Corporation, to supply dealing synthesis workflow for research and energy and chemical development. This will be the first large scale implementation of a high-throughput research system by Symyx [ph] a Chinese company.
An important step forward to expand our presence in China. From the services perspective our services team have performed consistently in the aggregate this year, facing challenges looking forward. With other performance in certain areas, the completion of certain major engagements in the fourth quarter and an uncertain business outlook for 2010 and beyond.
These challenges throughout the decision we announced today to restructure HPR. Specifically, we have returned our contract development in manufacturing organization or CDMO will be our performance objectives.
We acquired this business in the third quarter of last year, was primarily focused on tier 2 and tier 3 life science companies. That sector has been particularly hard hit over the past year and we don’t believe the recovery will be seen in 2010, but a further investment in this area is wanting [ph] under the circumstances.
Accordingly, we expect to exit our Camarillo CDMO facility this quarter and significantly reduced associated personnel. Importantly, however, we will be advancing the HPR biologics formulations workflow platform that we developed over the past year to support the CDMO business.
Further, we are exiting discovery, research services and managing our staffing level as complete remaining work for our clients. We will, however, be careful to preserve our core chemistry and material expertise, and infrastructure across multiple areas going forward in support of our product strategy.
In aggregate, the changes we are implementing will be largely completed by year end and we will take approximately 75 employees representing a 15% reduction in total company headcount.
I will also take a moment to know that Rick Boehner has stepped down from his position as President of HPR. Secondly, immediately, I will assume as interim President of the HPR organization. Rick initially joined Symyx in 2007 to handle our research services group with the focus on new business development.
Last year he took the leadership of the combined research and product organization, we commend him on HPR's contribution this year's. We thank him for his dedication and passion he brought to the company and appreciate for his continued support on a transition through unit.
Our focus looking forward is on HPR product based solutions complimented by key service offering to develop technology and better application size into our products. The time integration of instrumentation software and application science is essential to create value for our customers as a leveraged HPR to derive better faster results and compete and succeed in that market.
With the changes announced today, HPR has a good backlog, visibility and pipeline going into 2010. As we move forward, we will be keenly focused on ensuring this business delivers positive operating margins in 2010.
In summary, we have pledged throughout 2009 to improve our results and continue to manage the business to deliver ongoing operational and financial improvements, while maintaining our product and technology leadership across our software and HPR portfolios. We believe our best actions will serve the business well in 2010.
I’ll now turn the call over to Rex, who will detail our third quarter financial performance and provide an outlook for the fourth quarter and full year 2009. Rex?
Thank you, Isy. As a reminder, we have reconciled non-GAAP financial measures in the exhibits to our earnings release. Also, on our website at symyx.com, we have provided non-GAAP operating results for our business units. Non-GAAP EPS excluded amortization and intangibles and other acquisitions related items as well as items that are generally non-recurring such as impairments and restructuring expenses, and gains or losses from the sale of equity interests, but includes stock-based compensations.
Our adjusted EBITDA calculations exclude interest and other income or expense, taxes, depreciation, amortization, stock-based compensation and generally non-recurring items.
Revenue from the third quarter was $35 million at the midpoint of our anticipated range of $33 million to $37 million, a balance of $38.9 million for the third quarter of 2008. Software revenues for Q3 was $22 million, down 14% from $25.6 million for the third quarter of 2008, and that was $1.2 million from last quarter.
Consulting services were down $1.9 million from the same period a year-ago, while content, license fees and royalties revenues were down collectively $2.9 million. Maintenance increased by $1.2 million over the third quarter of 2008.
Symyx Software contributed non-GAAP operating income of $2.6 million or 12% software revenue. This compared with $0.8 million or 4% of software revenue for Q2 2009 demonstrating the higher contributions we can expect from this business as we drive revenues above $20 million per quarter.
Total HPR revenue was $13 million, down from $13.3 million for the same period a year-ago, and from $15.9 million for the second quarter of 2009. Research services and royalties totaled $7.7 million compared with $7 million for Q3 of 2008, and from $8.3 million from prior quarter.
Tools revenue was $5.3 million compared with $6.3 million for the same period a year ago and it was $7.6 million for Q2 2009. Tools revenue for Q3 was lower sequentially due to the fulfillment [ph] of an order into Q2 which we discussed on our last call.
Symyx HPR posted a non-GAAP operating loss of $500,000, compared with non-GAAP operating income of $200,000 for the second quarter of 2009 driven by lower revenues.
Regarding customers, our two largest, Dow and ExxonMobil accounted for 16% and 10% respectively of our revenue year-to-date. However, we continue to shift to a broader customer base with our next 20 customers, each accounting for over $1 million this year and 42% overall.
Turning now to margins and expenses, gross margin for the third quarter was 68%. This was down from 73% for the third quarter of 2008 with 2% sequentially. The sequential improvement in gross margin is primarily the result of improved software revenue.
Turning to operating expenses, we continue to be pleased with the significant progress we have made. Total operating expenses for the third quarter were $25.6 million, down 22% from $32.7 million the same period a year ago. Total operating expenses, as a percentage of total revenue in these periods were 73% and 84% respectively.
For the nine months ended September 30, 2009 total operating expenses declined 26% to $78.1 million from $105.6 million in the same period of 2008. These significant decreases reflect the restructuring we executed during the fourth quarter of 2008 as well as continued operating expense management this year.
GAAP net income for the third quarter was $1.5 million or diluted EPS of $0.04, compared with the net loss of $745,000 or $0.02 per share for the comparable quarter last year. GAAP net income for the quarter reflects $2.7 million in discrete tax benefit.
Non-GAAP net income for the third quarter was $1.8 million or $0.05 per diluted share, compared with a non-GAAP net loss of $1.6 million or $0.05 per share for the third quarter of 2008. Our efforts to control operating expenses benefited net income despite the year-over-year quarterly decline in revenue.
Adjusted EBITDA for the quarter was $4.7 million or 15% of quarterly revenue, compared with adjusted EBITDA of $2.9 million or 8% for the third quarter of 2008 and $3.6 million or 10% in the second quarter of 2009.
During the quarter, we reported 710,000 in restructuring cost in connection with the closure of our U.K. facility. This closure was part of our strategy to consolidate our offshore software development activities.
In addition, we reported $284,000 impairment charge in Q3 as we accrued a portion of our announced obligations arising out of the acquisition of Integrity Biosolution in the third quarter of last year.
Turning to cash, cash and cash equivalents at September 30, 2009 were $80.6 million, compared to $66.4 million at December 31, 2008 and as expected seasonally lower than $84.9 million at June 30, 2009. Capital expenditures in Q3 were in line with our expectations of $1.6 million.
Looking forward, we have taken significant steps to improve operating profitability and achieve better non-GAAP earnings per share and adjusted EBITDA despite lower revenues in 2009. As a result, I think we have successfully shift the key tools order and execute our restructuring in Q4 with limited disruption to our business and order [ph] activity. We expect to hit our non-GAAP EPS and adjusted EBITDA targets for the year.
Regarding the restructuring in Q4, we expect to incur charges including losses from sale of assets in connection with the CDMO exit of $4 million to $5 million, of which approximately $1.5 million to $2.5 million in cash. Most of these charges will be incurred in the fourth quarter, substantially all of the remaining balance incurred in the first quarter of 2010.
In Q4, we currently expect revenue of $40 million to $45 million. For full year 2009, we expect revenue of $145 million to $150 million at the lower half of our forecasted rates of the year $145 million to $155 million.
We expect non-GAAP diluted EPS for Q4 of $0.07 to $0.11 per share and for full year 2009 we anticipate non-GAAP EPS will be $0.12 to $0.16 per share at the high end of our previously revised range of $0.08 to $0.16 per share. These ranges exclude the restructuring charges I referenced a moment ago.
We estimated income tax expense rate of 23% for Q4 and for full year 2009 a benefit rate of 97%. As we look to 2010, we expect significantly lower HPR revenues as a result of the production and research services. And we will be driving improvement in Symyx Software, though we will have lower revenues next year than 2009 entering 2010 we will have transitions through our significant customer concentration and large contract exploration issues. Structure the company to a new baseline and positioned ourselves to more consistent progress in our businesses.
Thank you, and now I’ll turn it back to Isy for closing comments.
Thank you Rex. In closing, we believe we are on track towards delivering on our 2009 financial goals. After making a number of adjustments to our operations we anticipate ending the year on a solid note with enhanced products in software and HPR and the better position to deliver our goals improving, financial results and shareholder value throughout 2010.
Thank you. Now, let me open the call for questions. Operator?
Thank you. (Operator instructions)
Thank you, operator. We can end the call.
All right. Thank you. At this time, the conference has ended. Thank you for your participation.
Thank you. Bye-bye.
You are welcome.
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