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Accelrys (NASDAQ:ACCL)

Q3 2013 Earnings Call

October 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

Scott R. Berg - Northland Capital Markets, Research Division

Kevin Liu - B. Riley Caris, Research Division

Matthew J. Kempler - Sidoti & Company, LLC

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

Operator

Good afternoon. My name is Rachel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Accelrys Q3 2013 Earnings Call. [Operator Instructions] And Todd Kehrli of the MKR group, you may begin your conference, sir.

Todd Kehrli

Thank you. Good afternoon, and welcome to the Accelrys 2013 third 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 www.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 everyone that the remarks made during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Litigation Reform Act of 1995. These statements are neither promises nor guarantees but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Including without limitation, those risks detailed in Accelrys' filings with the SEC including our most recent annual report on Form 10-K for the year ended December 31, 2012, and our most recent quarterly report on Form 10-Q for the quarter ended June 30, 2013.

Accelrys disclaims any obligation to publicly update or revise any such statements to reflect any change in the company's expectations or in events, conditions or circumstances on which any statements may be based or that may affect the likelihood that actual results will differ materially from those set forth in the forward-looking statements.

The company also plans to discuss certain non-GAAP financial measures on this call. A reconciliation of the non-GAAP financial measures to GAAP financial measures is included in today's press release, and is available on the company's website at accelrys.com under the Investor Relations section. I would now like to introduce the company's President and CEO, Max Carnecchia.

Scipio Carnecchia

Good afternoon. We delivered solid financial results during the third quarter with revenue and earnings exceeding Wall Street consensus estimates. We have made progress and gained momentum with our market segment strategy, which is critical to our ability to continue to improve our execution, and we continue to make significant investments in our field and services teams and to refine our go-to-market strategy to better capitalize on key growth areas.

As we shared with you on our last call, in early Q3, we announced the significant corporate-wide restructuring, which will allow us to better align our resources and operations to the growth opportunities within our market segments. We have executed well to the restructuring plan with no short-term negative impacts to products, services or operations to date. We are confident that our actions -- the actions we have taken will, in addition to any immediate financial benefit, allow us to rebalance our resources and further invest around our growth products, as well as new products and will allow us to take advantage of the significant opportunity we have, as the leader in the scientific ILM category.

During the quarter, we continue to execute our strategy to optimize the discovery-to-market value chain by delivering major new product releases and enhancements including the following: We completed our initiative to standardize scientific structures across the Accelrys Enterprise Platform with the release of Accelrys Draw, Accelrys Chemical Registration and Accelrys Biological Registration. This harmonization of biochem informatics technology enables scientists to represent molecules, reactions, biologics and conjugates consistently across applications utilizing the Accelrys Enterprise Platform and the Accelrys Direct cartridge. This change not only enhances the usability and efficiency of our individual applications, but more importantly highlights our ability to deliver integrated end-to-end enterprise solutions and further optimize the discovery-to-market process.

We launched the data analysis and decision support tools, Accelrys Insight and Accelrys Insight for Excel to complete the rollout of our next-generation research informatics suite. Life sciences organizations today are struggling to bring innovative new drugs to market in part because discovery teams [ph] lack the ability to make informed and fast decisions about research projects. Accelrys Insight allows researchers to systematically exploit organizational data and knowledge across a collaborative scientific project team to reduce risk in decision-making, improve operational efficiencies and accelerate patient process.

We significantly added to the ability of organizations to accelerate collaborative small molecule and biotherapeutics discovery and research by delivering novel, integrated, predictive science solutions across a number of our products during the quarter. The complexity of today's science and the cost of experimentation can be prohibitive to timely and efficient innovation. However, the breadth and accuracy of predictive science such as those delivered by Accelrys, are now mature enough to facilitate resolution of a broad range of R&D challenges using less expensive and more scalable in silico methodologies.

In addition to delivering new value in our existing product set, we added to our product portfolio through the acquisition of ChemSW, a leading provider of environmental health and safety compliance solutions. This acquisition furthers our strategy to optimize the scientific innovation lifecycle by providing solutions for managing and tracking source, use and disposal of chemicals along the entire lab-to-plant value chain. This ability to manage chemicals across the full product lifecycle helps organizations in regulated industries enhance compliance with increasingly complex global, national and local regulations and is critical to advancing their sustainability strategies.

Our strategic vision around the scientific ILM category and our market segment approach was further validated through some significant customer engagements during the quarter. For example, a major pharmaceutical company expanded its utilization of our products and services with a successful proof of concept. This customer believes that our product offering will enable them to make better decisions about candidates in their pipeline, improve the quality of those candidates and do so more quickly and at less cost. Based on successes to date, we anticipate that this customer will continue to integrate more applications and workflows across varied science domains among their labs and across their global ecosystem. With that, I'll turn the call over to Michael, to update you on the financial performance of the business.

Michael A. Piraino

Thanks, Max. I'd like to start by thanking everyone who attended Analyst Day here at the company's new corporate headquarters last month. Attendance was great and we enjoyed having you all here, and we hope that you found the day informative. In addition to information contained in our press release and in our prepared remarks today, the investor fact sheet can be found in the company's website under the Investor Relations section, along with a full reconciliation of GAAP to non-GAAP results. We start with reminding you -- excuse me, that Q3 is the smallest quarter of the year for order contribution. Sales execution, pharma demand, a little deal flippage in some foreign exchange, challenged us on the orders line. Total orders including orders for professional services for the quarter were up 2% when compared to the same period a year ago. Total orders on a year-to-date basis including orders for professional services were up 1%, when compared to the same period a year ago.

Areas reporting year-on-year increases for the quarter were the Americas, our global Life Sciences team and EMEA. As we've previously reported, EMEA has been under new management since May 2013, and we continue to experience foreign currency headwinds in Asia. On a reported basis, AsiaPac orders were down 16%. However, on a constant-currency basis, AsiaPac orders would have been up approximately 5% when compared to the prior year. Orders contribution for Q3 2013 when compared to Q3 2012 is as follows: Life Science Research and Development representing 40% of orders for the current quarter was down approximately 8% versus the prior year; ADQM, representing 20% of orders for the current quarter, was down approximately 1% versus the prior year and this includes the contributions from newly acquired Aegis and Vialis; and Material Science and Engineering, representing about 40% of orders for the current quarter, was up approximately 15% versus the prior year.

Prior-year order numbers that were used as the basis for these comparisons, have been calculated using allocations, since the business was not organized according to market segments during those periods. The current year order numbers do represent specific market segment assignments. These year-on-year comparisons should be considered preliminary.

Trailing 12-month renewal rates for subscriptions on term licenses were 88%. Trailing 12-month renewal rates for maintenance averaged approximately 86%, and trailing 12-month renewal rates for content were at 89%. There was one customer 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, 52%; EMEA, 30%; and AsiaPac at 18%. Non-GAAP revenue for the quarter ended September 30, 2013, was $44.3 million compared so $43.4 million in Q3 calendar year 2012, representing an increase of 2%. Non-GAAP revenue for the quarter on a constant-currency basis was $46.2 million, the direct result of a $1.9 million of continued unfavorable foreign currency translations coming from the Japanese yen-U.S. dollar pair. Year-to-date currency conversions have cost us $5.2 million in revenue comparisons. Content revenue for the quarter decreased 19% from $2.9 million to $2.4 million. The Aegis, Vialis and ChemSW contributions to revenue for the quarter were approximately $6 million, resulting in an organic non-GAAP revenue decrease for the period of approximately 7% using constant currency dollars.

Gross margin as a percentage of non-GAAP revenue improved 200 basis points when compared to the prior-year period. The result of better services margins and lower third-party royalty costs. Total non-GAAP operating expenses for Q3 2013 were $23.6 million versus $25 million a year ago or a decrease of 5%. Compared to the same period a year ago, sales and marketing expenses were up approximately $0.2 million. Research and Development was down $1.1 million when compared to the prior year. And G&A was down approximately $0.6 million or 16%. All of those categories were the beneficiary of the company's recently announced restructuring in which 80 individuals were terminated, as well as some lower performance incentive accruals.

Non-GAAP operating income was $11.3 million versus $8.4 million for Q3 2013 and 2012, respectively, or an increase of 35%. ChemSW had a negligible impact on revenue, operating expenses and non-GAAP operating income for the quarter. Adjusted EBITDA for Q3 was $14.1 million or 31.7% of non-GAAP revenue compared to $10.6 million or 24.4% of non-GAAP revenue for Q3 2012. Non-GAAP earnings per diluted share was $0.14 for Q3 2013, compared to $0.11 for the comparative period.

Looking at the balance sheet. We had total cash, investments and secured notes receivable of $136 million as of September 30, 2013, as compared to $196 million a year ago. That comparison comprehends $50 million spent for acquisitions, $13 million for stock buyback and $14 million for capital expenditures during the past 12 months. Offset by the early collection of full value of the Intermolecular note receivable, which was valued at $26 million. Free cash flow for the quarter was $11.1 million, bringing the year-to-date total to $16.3 million. Adjusted for the new corporate headquarters project, year-to-date free cash flow for 2013 would have been $23.3 million. So this compares to $9.9 million for Q3 2012 and $22.8 million for the same period last year.

Depreciation expense was $1.2 million for Q3 2013 compared to $0.9 million for the comparative period. Capital expenditures for the quarter amounted to approximately $2.3 million compared to $1 million for the same period a year ago. Cash taxes for the quarter were $1 million compared to $0.5 million a year ago.

Finally, we'd like to provide our revised guidance reflecting the company's expectation for calendar year 2013. For the year ending December 31, 2013, we expect non-GAAP revenue to be between $177 million and $179 million. We expect non-GAAP diluted earnings per share to be between $0.33 and $0.34 on fully diluted shares, weighted average shares outstanding of 57 million, using an effective pro forma tax rate of 40%.

Additional comments with regard to our revised 2013 guidance are as follows. Aegis, Vialis and ChemSW are expected to be accretive in the aggregate to non-GAAP earnings per share for the entire year. Aegis, Vialis and ChemSW are expected to contribute in the aggregate approximately $13 million to $15 million in revenue for 2013. We expect revenue and earnings per share headwind from foreign currency for the remainder of the year, and the guidance presumes that adjusted EBITDA to be in the range of $34 million to $35 million for the year. And capital expenditures are expected to be approximately $14 million for the year and that does include the $7 million for the new corporate facility. And finally, we would like to point out that the M&A pipeline remains full and we're committed to continuing to use excess cash to make on-strategy, growing and profitable acquisitions. So Max, that's my quarterly report. Back to you.

Scipio Carnecchia

Thank you, Michael. As I mentioned at the beginning of our call, we are pleased with our solid financial results in Q3, as well as the momentum we are seeing with our go-to-market approach. We were also gratified by the further validation of our strategy and vision from industry leaders who participated in the Accelrys Life Science symposium in September. In addition to presentations on informatics, predictive science and externalization solutions from Accelrys, the executives from Sanofi, BT, MedImmune, GlaxoSmithKline, Merz and the University of Dundee, the symposium provided a forum for industry colleagues to exchange ideas on some of the most critical challenges facing the life science industry today. Including collaborative partnerships, leveraging external innovation, addressing cost pressures, accelerating [ph] time to market. We believe that our vision for how best to deliver solutions for the scientific ILM category, continues to be validated by third-party market research.

In a recent report entitled Product Innovation Requires Laboratory Informatics Systems to Transcend Phases, Gartner states, that manufacturers must strengthen laboratory insights to improve innovation, operational effectiveness and product quality by leveraging lab informatics systems that span more than one phase of the new product development. In the Gartner report, Accelrys was the only vendor to achieve the highest possible rating in all 5 categories of new product development, and was among only 4 ELM vendors of 23, to also offer a laboratory information management system. We believe this report, and others like it, highlight the importance of the end-to-end approach inherent in our scientific ILM strategy, and that we are uniquely positioned to provide value to our customers across all areas of new product development. In the final quarter of the fiscal year, traditionally our largest from an order's perspective, our team is heads down, focused on execution and achieving our operational targets. We believe that the market opportunity in front of us is as strong as ever and that we are well positioned to execute on our plans, build a world-class growing software company and create value for our shareholders, employees and customers. With that, operator, we'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Scott Berg of Northland Capital Markets.

Scott R. Berg - Northland Capital Markets, Research Division

I guess, real quick here. Max, as you exited the third quarter, how would you say the changes to your sales team and go-to-market strategy have been evolving relative to the end of the second quarter, the first quarter in terms of maybe what you're seeing in the pipelines today?

Scipio Carnecchia

Sure. So I think that the way to comment on that, we've made substantial changes at the beginning of the year that, previous calls, we've opined on that and provided a lot of information. I think, Q3 being not just a small quarter but also a summer quarter, it was an opportunity for us to make sure that, that was continuing to gain momentum and continuing to take hold. Through the course of the quarter, we continued to upgrade and fill open slots in our field organization. I think we brought some more clarity to our services organization to make sure that we were focused exclusively on opportunities and engagements to services that were either in support of previously sold licenses or in support of proof of concepts and pilots that would ultimately lead to license sales. And to do that, with the customer satisfaction in mind but also balanced against the idea that those have to be profitable, good margin service opportunities. So I think those are some of the things, Scott, I would point to. I think we made a ton of progress in Q2. We made a lot of progress here in Q3, but we were kind of coming out of a hole from Q1 to begin with as we've previously reported. So those will be my comments on that.

Scott R. Berg - Northland Capital Markets, Research Division

Sure and as a follow-up to that, given that Q4 is your largest, as you noted, ordered period of the year. How would you view those pipelines on a year-over-year basis and granted currency headwinds is creating maybe a little bit of a difficult compare, but any color on how we should be thinking about those?

Scipio Carnecchia

Well, I think overall, particularly through our own organic efforts and then through the addition of some of the acquisitions we've done, in the course of the last 18 months, we've watched the overall pipeline grow. I want to be careful about any comments around Q4. We're really focused here on Q3. But I think we feel good about it. We feel good about the progress that the team's making in the field as far as their maturity coming up, that change in go-to-market approach that we've talked about a lot, and that just the over arching number of opportunities that they have to work in the pipeline, is a growing opportunity set.

Michael A. Piraino

And Scott, it's Michael, just commenting kind of quantitatively about FX, that's been kind of a consistent pattern throughout the year. As probably everyone on the call knows, with many companies they follow having an international component, it's coming out of Asia as everyone knows as well. But to give you an idea just on the revenue line, this last quarter was $1.9 million. I think the quarter before was $1.5 million, and the first quarter was $1.7 million. So we're almost $6 million through 3 quarters. And again, I'm comparing it to when the rates moved last year. So I think we'll still have that headwind in the fourth. So we're looking at $7 million to $8 million, maybe as high as $9 million of FX headwind directly on the revenue line. But of course, the corollary there is that when we translate orders, it's basically kind of the same math. So hopefully, that stabilizes as we move into next year.

Scott R. Berg - Northland Capital Markets, Research Division

Okay. Great, and then my last question for you Michael is on the operating expenses with the restructuring that came about earlier this quarter. Considering that you reiterated your full year EPS guidance implies that some of them, some of the operating expenses will likely tick up here in Q4, should we think about that being more in the sales and marketing line? Or do you return some of the spending in product development that was -- certainly came down a lot in the quarter?

Michael A. Piraino

Well, I guess to back up entirely to the restructuring. That benefit started at the beginning of the third quarter, will continue actually through the first quarter of next year. We certainly were beneficiary here, the guidance does presume that there'll be a benefit in some of those underlying categories in Q4. But if you go back to the linearity of operating expenses, historically, over the 4 years I've been here, you know that Q4 ticks up and it's primarily in the category of sales and marketing, right? Because that's where we're booking commissions and I'm recording both royalty expense, third-party royalty expense and commissions in direct association with the orders in a particular quarter. So you will see a fairly significant incremental tick up in sales and marketing between Q3 and Q4. If you go back to last year, it was over $4 million. Like from 12 3 to 16 7. There's likely a similar increase from a trend standpoint anyway, this year.

Operator

Your next question comes from Kevin Liu with B. Riley & Co.

Kevin Liu - B. Riley Caris, Research Division

So just one quick follow-up on the guidance question. So I mean, the revenues go up nicely in Q4 relative to even the strong third quarter here but EPS essentially, gets cut in half. So I guess, I realize that -- the seasonal trends in the sales and marketing line, that makes sense, but is all of it attributable to that or are there other factors that we should consider here?

Michael A. Piraino

You mean in terms of the year or you're talking about the implied guidance for Q4 because we give the year and you've already got 3 quarters?

Kevin Liu - B. Riley Caris, Research Division

Exactly, so the implied guidance for Q4 would suggest a sequential uptick on the revenue line, but EPS essentially goes down to $0.06 or $0.07, which would be comparable to kind of Q1 here, I understand the case about sales and marketing going up from seasonality, but just the magnitude of that dropoff is still a little bit surprising to me.

Michael A. Piraino

Yes, we do have, going back to the third quarter, we do have other seasonal benefits in the third quarter, both on the gross margin line and on the OpEx line, and that has to do with the fact that it is summer. We have a lot of vacation when that accrual comes down. We basically kind of escape that expense. It builds up again into the fourth quarter. But by and large, the increases there are going to be, as I mentioned to Scott, on the sales and marketing line and then of course, with Q4 and everything in the books for the year, then we finally true-up all the other Management Incentive Plans.

Kevin Liu - B. Riley Caris, Research Division

Got it, and then you guys mentioned Q4 being the biggest orders quarter. From what you're seeing in terms of sales cycles today and the opportunities that you have, can you talk about your opportunity to accelerate orders at least on a year-over-year basis for just Q4 specifically back in the double-digit range? And just looking at kind of the renewals you have -- have coming up, are you going to be able to bolt-on other products or services, when some of these term licenses come due?

Scipio Carnecchia

Yes, it's a tough one, Kevin, just because we want to steer clear of trying to provide any kind of orders guidance for Q4 that's not been our intention. It’s just been off limits. But just to try to give you a little color. I mean, we definitely are seeing, with a more robust portfolio if you look at each one of the segments, particularly MS&E and ADQM, you've got an opportunity to go back into existing customers that have a toehold or a foothold with a single solution and then do that cross-selling. Whether it's a maintenance contract that's up for renewal or whether it's a subscription, an annual right-to-use license that's up for renewal. That would be a very logical place to do that kind of that add-on. Balance that with we have seen circumstances where some of these orders have gotten -- some of the combination of orders has gotten so large, because you're adding things and you had 2 or 3 line items to begin with, and now you're adding 2 or 3 more line items. The over arching dollar amount has gotten so large that it's now got to go through a different level of approval cycles and we've noted that in some previous calls. I think that's just kind of the color I would provide. Earlier to the previous caller's questions, the pipelines have grown. They've grown both organically and then through the acquisitions we've done, so we feel good about that and I think we're back to, how do we execute on that.

Kevin Liu - B. Riley Caris, Research Division

Okay, just one last one for me. In the past couple of quarters, you guys have talked about the various betas and pilots that could be underway and how that's a leading indicator? Any updates in terms of how the ones you've had working are progressing, whether they've turned into nice wins for you guys? And beyond that, as you look at the pace of new pilots starting up, how does that shape up for organic growth next year?

Scipio Carnecchia

Yes, I'll take the second part first, which is we continue to see that be the mode of operations for the customers in these markets. That they want to run a paid proof of concept or a pilot or a phase 0, on some of these significant implementations whether that's a notebook, whether that's a lab execution system, whether that's a limb system and those things run for -- sometimes we're asked to do it for quite extensive periods. We try to negotiate off of that. But those can run for 3 to 6 months before the customer is prepared to make the commitment on the license. So what we've talked about -- for now, I think it's the better part of 6 quarters, seems to be a model that our customers, that the market is requiring at least for now. The first part of your question, the one -- this is a little point of consternation internally here, where we try to share -- we want to share more and more customer case capsules or success stories, as Michael and I would refer to them. And we've provided one about a large multinational global pharma company. It's top 20 pharma, you could start to guess the names but we've really been challenged in trying to able to disclose more about these success stories. The name of the organization, some of the more specifics, just because of competitive nature of what they're dealing with and how they view what they're doing with us as competitively differentiated. Now having said that, the example we used -- I won't use the name of the company, the name of the -- the example we used for Q3 in the prepared remarks is an example of something where we worked, I want to say it was 5 or 6 months on a proof of concept to turn that into a license sale. Which actually was a bolt-on or add-on cross sell to an existing substantial subscription. So to your earlier question. And we've got other examples of those, we just want to be able to be a little bit more forthcoming or maybe robust in the way we could share some of these stories with our owners, with the investors.

Michael A. Piraino

I would also add to that. I mean, I think, Max in responding to Scott's question initially just talked about how there's complete alignment with the organization now with the professional services organization, with the field organization in terms of sales and the execs. That as we're chasing down service order opportunity, we're doing it with license in mind. Either in support of a license that's already out there or in pursuit of potential licenses. So that's kind of driving the day-to-day, week-to-week sales activity. So kind of point number one. Point number two, unlike license orders, which don't have hardly any current quarter yield from a revenue standpoint, we do, do a lot of T&M work. So if you look at professional services revenue in the quarter, I'm not saying it's a complete indicator of kind of where orders were, but it certainly tied a lot closer to what you get from license. Well why do I say that? You look at the year-on-year comparisons either year-to-date or during the quarter, last year services was just under $6 million, this year services was $8.2 million, it's 37% increase, and it's about a 35% or a 36% increase on a year-to-year basis. So yes, we're super busy in that area, but again it's all in pursuit of licensing.

Operator

Your next question comes from the line of Matthew Kempler with Sidoti & Company.

Matthew J. Kempler - Sidoti & Company, LLC

So I guess I want to piggyback on those last statements. And looking at the services up sharply year-over-year, is that continuing to be driven primarily by the proof of concepts? And then, if so, how satisfied are you with the conversion rates at this point in time?

Scipio Carnecchia

Matt, it's Max. I think it is a combination of the proof of concepts, that being part of the model, what I -- the comments I made earlier. And then, once you, just to kind of play it through, once you've done a phase 0 or proof of concept and the customer lays an initial license down. Let's use an example, for notebook, we're in the middle of a very significant notebook product with one of the largest adhesive companies, they've got 7,000 researchers, scientists. And the initial order is, after doing a 6-months proof of concept and paying us for the services, the initial order was for 1,000 seats of notebook licenses. With a goal over 3 years to deploy to every one of those scientists, right? So there's still continued work to be done, another phase of service work to continue to roll that out into different facilities or different business units, which may have slightly different business rules, right, so you've got the training, you got the implementation, you've got the configuration and so, when you asked the question about the services, it's a combination of both work ahead of time on proof of concepts and pilots and then it's the follow-on work. And the ongoing work with just customers that we have.

Michael A. Piraino

When it leads to service, when you harvest that and when it leads license, it doesn't all come at once. There's sequential or incremental license opportunities in the way of additional seats, so it doesn't come all at once.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then I wanted to follow-up on the restructuring. So when you initially indicate you were eliminating 80 heads, you said you will be refilling about 40 of them, adding skill sets in key areas, just wondering how that's tracking along?

Michael A. Piraino

Yes, Matt, it's Michael. Obviously, the terminations, of course, took place right away. And there are some transitions that are taking place through, I think, March of 2014. We've done some relocations from some existing facilities. Where we actually either had moved talent or in the process of moving talent, just a handful of that 80 is in that particular category. And the recruiting group is incredibly busy trying to attract and replace the new heads and the new activities, that we've developed. We're probably a little bit behind plan on bringing those additional 40 on, but I think we'll get there by the critical period at the end of the year.

Scipio Carnecchia

And I don't think that's from -- Matt, this is Max. That's not from any lack of effort, it's just being discerning about getting experience and skill sets. And most of those jobs end up here or end up in the field organizations, so it's a combination of product and field-facing.

Matthew J. Kempler - Sidoti & Company, LLC

Okay, and then on the renewal rates, I know that's -- they been holding steady. But I know you guys have identified that as an area where you think it will help drive better growth, by moving those renewals rates up over time. Can you maybe review what steps were taken most recently? And where do you think we are in the process of trying to improve those rates?

Scipio Carnecchia

Well, I think, in the prepared remarks we talked about some of the enhanced products that were released. I'm winding back through here, the Accelrys Direct cartridge, the Accelrys Chem Registration, the Accelrys Biological Registration, as well as Accelrys Insight and Insight for Excel. All of those initiatives, which ride on the Accelrys Enterprise Platform, are efforts that have been underway going back 3 years ago, to harmonize and unify the way we do scientific structural representation and data management. And you'll remember, there's a bunch of different historic products. Some of which Accelrys had, some of which Symyx had before the merger, and part of the weakness that we have in renewal rates has to do with the headwinds particularly in the pharma industry around layoffs and site closures and restructuring when they do combinations. But some of that pressure has also been having products, having functionality in these key scientific foundational areas that's current, that's modern and that we delivered in Q3. We've been working for towards -- looking towards a long time to help fortify and put our field organization in a much stronger position when they are out there getting those renewals. So that would be one example. On the other side of the ledger is some of the hard decisions we took a 1.5 year ago on the content business. Just to get straight, in our own heads, what elements of content were strategic for us? Which are the sourcing databases ACD and SCD. And some of the things that are not as strategic, those third-party databases that we we're basically just reselling and getting a low margin on, and that we've sunset and been able to put customers in a different place with.

Michael A. Piraino

One other thing I would add, Matt, is I think you've been following the story long enough to know that we do have initiatives within the sales group on renewals to do multi-year, right? The first idea is to try to do multi-year, and I think we've had, over the last year or 2, as we've been tracking that. We've had more success doing multi-year and why is that important, what does that mean? Well, it moves us away from that kind of annual totally tied to budget catch-and-release kind of activity. So I think to the degree that we're successful, and we have been, doing more multi-year work, we can pull that renewal rate up.

Operator

[Operator Instructions] Your next question comes from the line of Chad Bennett with Craig-Hallum.

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

I jumped on a little late. So just maybe these questions are redundant but...

Todd Kehrli

Should we do the whole thing for you again? This is Todd Kehrli from the MKR Group, welcome to the conference call.

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

I'm sure everybody on this call has all the time in the world, so let's just redo it again. No. So did you address the deferred revenue decline year-over-year?

Michael A. Piraino

Not in the prepared remarks but, of course, I'm always prepared for your question. Just as foreign currency is kind of hurting us on the revenue comparisons, it hurts us on the deferred revenue comparison. The impact, and I looked at this just before coming onto the call, on a year-on-year basis was basically $4 million. So fairly significant when you kind of look at the FX impact. I continue to remind everybody that it's deferred revenue, in the ups and downs it's not precise, and you got things that are in there that require deferral and then you release some stuff. But by and large, we're still kind of trudging uphill against a challenging Q1 orders performance. But the expectation that we built and the way be put the guidance together and so on kind of replenishes that fund here moving into the fourth quarter on a substantial basis and hopefully bring it back up to more normal levels, but the year-on-year impact was $4 million.

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

Okay. And then did you talk about or mention how much ChemSW contributed in the quarter? I know it was maybe a month, but did you give a dollar amount there?

Michael A. Piraino

We said $6 million for all 3: Aegis, ChemSW and Vialis. ChemSW as you say is very, very small.

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

Okay. So when should we expect year-over-year, kind of consistent year-over-year growth across multiple segments? In your new segmentation that you give, I think -- now there are different growth rates, or different magnitudes. I think, we believe at least over some point in time they're all 3 growth segments at the end of the day. Do you have any visibility to when 2 out of the 3, or maybe 3 out of the 3, consistently grow?

Scipio Carnecchia

So it's an important and hard question to answer Chad, this is Max. I appreciate it nonetheless. I'll go through first and kind of stack-rank them, and give you a little color. And then maybe, I don't know that I'm going to pin you down -- or you're going to get me pinned down to a specific date but directionally. And we've talked about this before, right? If I had to go kind of highest growth in the short term to lowest growth in the short term, the Material Science and Engineering, the MS&E segment, as it grew this quarter looks to us as to be the one that can get to double-digit growth consistently, the fastest. I'll come back and put the color on that. ADQM would be the second segment on that stack ranking and then the Life Science Research and Development. And the color there, again just to kind of wind through those, maybe bottom to top. The Life Science Research and Development is an important segment for us. It's the heritage of this business. It's the top 150 Life Science pharma, Biotech, CRO, CMO organizations out there in the world and it's also the place where, particularly on that research side and all the things we've documented before with site closures and layoffs and redundancies associated with restructuring, is the one that's under the biggest headwind. And so, while we believe that can be a growing contributor from the whole portfolio in the entire assumed [ph] landscape, it's the one that's under, probably, the biggest pressure. Kind of walking up the stack, ADQM, that is primarily an automation opportunity for us, where most of the organizations today that are doing work in these areas are doing it on the back of paper and doing it on the back of Excel spreadsheet and very manual processes. And what we're finding there is that those sales cycle are long because what these organizations do in this area around quality and compliance is absolutely critical and so, the steps they go through to validate that the problems are actually being solved through automation is a longer set of cycles, or longer sales cycle, than maybe some of the other areas in our business. But we will absolutely get there because the pain is acute and it's not -- these aren't vitamin kind of pain. This is you've got a headache and you got to take some ibuprofen. And then back up to the top with MS&E, it's the segment for us that looks the most like greenfield. It doesn't have some of the -- to the same degree, the regulatory and compliance constraints that the Life Science ADQM has and so, the sales cycles are shorter, we're automating things that have been done either in-house or been done, again, through paper and manual processes. But the sales cycle can be a little crisper through there and the return on investments are very strong and very direct and very easy for us to justify. So that's the color I would give you, to kind of wind that back to a time line, do you want to take a stand on that one, Michael?

Michael A. Piraino

Not really, I don't want to get out there relative to '14 and when it's not been our convention to do that. I would point out that we did have 3 out of 3 last quarter. Unfortunately, we've had 2 quarters where 2 of the segments were down. So some of its consistency and that kind of goes back to the attention we're paying to execution.

Scipio Carnecchia

Yes, field execution.

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

Yes, I mean I appreciate you don't want to get into kind of when the inflection happens or when you get everything going in the right direction. But I think when you make -- when you're as acquisitive as you are, or have been in the past couple years, and we're struggling to see these segments grow, I think it's -- we assume we are acquiring pretty high-growth businesses, right, in good segments and we assume even some of the existing businesses we already had were growth segments. So I think everybody's trying to kind of -- scratching their head. Are we acquiring stuff to actually grow the business here, which I obviously, I think that's the intent, or kind of what's going on under the hood, where we're just not seeing the top line lift that we thought we would at this point.

Michael A. Piraino

Well certainly you're right about the early part of your statement, where when we look at M&A candidates we're looking at candidates which have, not only very acceptable growth rates but very excellent growth rates. Our expectation is after an integration period where you always face some integration challenges but after an integration period, we expect to kind of move that product and service through our channel and expect to do better than kind of the historical. And I think we've had a lot of success along that path. So I think that's been something that we feel pretty good about. The other challenges that come with the other segments from an organic standpoint, they are what they are. We try to articulate in every quarter. Max and I still, along with our field organization, look each other in the eye every quarter. Is there anything that suggests to us that in the long run this is not a double-digit growing business with acquisitions on top of that, and we still believe that. Max's nodding his head up and down because I know he absolutely agrees with that. But again, to try to pin that down to a month or quarter is probably a place we don't want to go.

Scipio Carnecchia

I was just going to caution a little bit here, Chad, remember the Q3 for us is really a small quarter from an orders intake perspective, I mean, its 13% of the orders for the year, historically, if you start to break that down into the segments, something like ADQM, a $300,000, $400,000 order that slips from September to October is the difference between...

Michael A. Piraino

Up or down.

Scipio Carnecchia

It's not just up or down, but down 1% or up 7%. It's that kind of math, so just let's keep that in mind too.

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

I hear you. I think it's probably the most important thing is you guys still feel confident this is a double-digit growth business. So that's kind of the net take away that I wanted.

Operator

There are no further questions. I'll turn the call back over to Max Carnecchia.

Scipio Carnecchia

Well, I think, that's it Rachel. So thanks, everybody. For participating with us today. I think that was a good question to end on, because Michael and I and the executive team here at Accelrys absolutely believe we've got a very significant opportunity wrapped around scientific ILM. And that we, as a company are uniquely positioned to get at it and exploit it and be the clear leader, and we're going to continue to work just at that and with that, we'll get back to that work. Thanks, everybody.

Michael A. Piraino

Thanks, everyone. Have a good evening.

Operator

Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.

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