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Executives

Todd Kehrli - IR, MKR Group

Max Carnecchia - President and CEO, Accelrys

Michael Piraino - CFO, Accelrys

Analysts

Chad Bennett - Northland Capital

Raghavan Sarathy - Dougherty

Bryan Long - Chesapeake Partners

Symyx Technologies, Inc. (SMMX) F1Q11 (Qtr End 06/30/2010) Earnings Call August 5, 2010 5:00 PM ET

Operator

At this time, I would like to welcome everyone to the first quarter earnings conference call. (Operator instructions) I would now turn the call over to today's host, Mr. Todd Kehrli.

Todd Kehrli

Thank you. Good afternoon and welcome to Accelrys's first quarter fiscal 2011 conference call. A press release was issued this afternoon detailing these financial 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's President and Chief Executive Officer; and Michael Piraino, Accelrys's Chief Financial Officer.

Before they begin, I'd like to remind you that the follow discussion, including the company's responses to questions at the end of the formal remarks, contains forward-looking statements relating to the company's future results, including future earnings, revenue, financial position, profit, expenses, orders and bookings.

Our actual results may differ from these forward-looking statements due to a number of factors, including macroeconomic conditions, lack of demand for our products and ability to execute on our strategic product roadmap, integration plans, sales and marketing plans, or other factors which may cause actual results to differ from these projections.

Additional information concerning factors that could cause actual results to differ materially from these forward-looking statements are contained in our SEC filings, including the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2010; quarterly reports on Form 10-Q; and current reports on Form 8-K. The company disclaims any intention or obligation to revise any forward-looking statement whether as a result of new information, future events or otherwise.

Before I turn the call over to Max, I want to make everyone aware of the fact that we're experiencing some power outage issues in our area. And in the event of an outage, we may lose sound service. In that event, we will dial back into the call as soon as possible to make sure we finish our prepared remarks and answering the questions.

With that said, I'll now turn the call over to Max.

Max Carnecchia

Thank you, Todd. Let me start by providing a snapshot of highlights of our first quarter before turning it over to Michael who'll comment on the financial performance in more detail.

This was a milestone quarter in which we announced our merger with Symyx Technologies. A significant amount of planning occurred over the course of the quarter, culminating with the merger closing on July 1 following the approval of shareholders of both companies. I would like to take a moment and welcome our Symyx colleagues as well as our new shareholders.

We are excited about the combination. As a merged entity, we are the clear leader in scientific informatics software and services. We've expanded the breadth and depth of our product portfolio and team, putting us in a strong position to execute on the opportunity ahead of us.

Each company carries with them a rich heritage and each has made significant contributions for the development of scientific informatics. After careful consideration, we've decided to move forward with Accelrys Inc. as the name of the combined entity and over time we will be consolidating our products and services under that single brand.

Our results this quarter demonstrate that while integration planning was a key priority, we did not lose sight of our day-to-day operational responsibilities. We delivered important product releases, held our user group meetings in North America and Asia Pacific and our order results tracked the expectations.

This call focuses on early integration activities and the Q1 results of the pre-merger Accelrys Inc. But I would like to take a moment and thank Isy Goldwasser, his leadership team and the Symyx employees for their commitment and focus during the quarter.

At this point, I will turn the call over to Michael to take us through the financial results.

Michael Piraino

Thank you, Max, and thanks to everyone for joining us this afternoon and allowing us to update you on our Q1 performance. I would also like to welcome Symyx shareholders and colleagues to the company. We're delighted to have you with us and are excited to kick off our inaugural call for the combined company.

This afternoon, I'll be providing some color on the company's decision to change its fiscal reporting period to December 31, detailing some key financial highlights from our first quarter, updating you on the progress of our integration with Symyx as well as providing initial combined guidance for the next six months.

In prior quarters, the company has made reference to certain seasonality trends or financial policies of Accelrys. These trends include the impact of seasonality on orders, expenses, cash flow, billings and collections, and explain how subscription accounting differs revenue from orders received to subsequent quarters. We believe this information can be helpful to investors in understanding Accelrys on a quarterly basis. This information can be located on our website in the Investor Relations section under financial modeling.

First off, I'm pleased to announce that our Board has approved the change of our fiscal year from March 31 to December 31 effective for the period ending December 31, 2010. We believe that aligning our financial reporting cycle with the calendar year will make it easier for our stakeholders to track our financial results in the timeframe that is consistent with our peers.

The change also synchronizes the reporting period with our commitment to complete our merger integration plan and extract cost synergies by the end of the calendar year. Calendar year 2011 will commence our first post-integration annual reporting period, and we look to it as the benchmark for measurement.

Despite everything going on around this, we managed to deliver a solid quarterly performance. Orders for the first quarter were above Q1 fiscal 2010 levels. Subscription renewal rates averaged 83% across all product categories for the quarter.

There were no orders in excess of $1 million during the quarter, which is consistent with the prior year. Our orders in Q1 are typically dominated by the Asia Pac region and accounted for approximately 50% of total orders for the quarter, which is consistent with the prior.

Last year, we received a portion of an order relating to usage from a large pharma customer in Q1 2010. Subsequently, we entered into a multiyear agreement with this customer pursuant to which all of the orders is taken in the subsequent quarter.

Factoring out the portion of that order, which was in Q1 of last year, Pipeline Pilot grew at double-digit rates. This Pipeline Pilot platform is the backbone of our scientific informatics strategy. And although the follow-on solutions will include the pull-through of many other Accelrys products and services, the platform orders are a good indicator of our success in providing scientific informatics solutions to our customers. Our outlook on the Pipeline Pilot platform calls for double-digit order growth through the remainder of the calendar year.

We continue to gain traction in the chemicals and materials space with Materials Studio. Business remains concentrated with our top 25 customers accounting for approximately 50% of total orders for the quarter. However, no customer accounted for more than 7% of orders for the quarter.

Revenue for the first quarter was $19.8 million compared to $20.1 million in Q1 2010, which represented a 2% decrease over the prior year. Revenue consisting of license and services on our large Pipeline Pilot consulting engagement is being deferred pending completion of the work. It had been scheduled to be delivered in the June quarter, however has slipped a few months.

Revenue breakout for the quarter by geography was as follows: North America 48%; India 29%; and Asia Pac 23%; approximately the same contributions as Q4; although, as previously mentioned APAC orders accounted for a seasonally high 50% of total order intake for the quarter.

Non-GAAP cost of revenue, which excludes purchased intangible amortization, was $3.7 million for the first quarter compared to $3 million for the same quarter of the prior year. Cost of revenue includes expenses related to royalties, product distribution and professional services.

The increase in cost of revenue was primarily attributable to an increase in personnel and consulting costs in our professional services department in addition to an increase in software royalties due to product mix. Certain costs incurred on the large consulting engagement previously mentioned were charged to cost of revenue, creating a drag on gross margins and operating income for the quarter.

Our non-GAAP gross profit for the fist quarter was $16 million or 81% of revenue compared to $17.1 million or 85.1% of revenue for the same period last year.

Total non-GAAP operating expenses, defined as GAAP operating expenses less charges for non-cash stock compensation and business combination costs, for the quarter decreased $0.6 million to $14.4 million or 72.7% of revenue, down slightly as a percentage of revenue when compared to Q1 2010 non-GAAP operating expenses of $15 million, reflecting close attention to cost control.

Foreign currency fluctuations had an immaterial impact on our revenue, cost of revenue and operating expenses for the quarter.

Non-GAAP operating income for the quarter was $1.6 million compared to Q1 2010 non-GAAP operating income of $2.2 million. Non-GAAP net income for the quarter was $1.3 million or $0.05 per diluted share compared to Q1 2010 non-GAAP net income of $1.8 million or $0.07 per diluted share.

Now generally, our conference call discussion centers on non-GAAP measures, but I do want to point out that our stock-based compensation expense for the quarter was impacted by recent additions to the executive management team.

Free cash flow for the quarter ended June 30, 2010, was $1.4 million. This compares to free cash flow of $2.6 million for the same period of last year. We define free cash flow as non-GAAP operating income or loss plus interest income and depreciation less capital expenditures.

Depreciation expense was $332,000 for the quarter compared to $411,000 for the same period a year ago. Capital expenditures for the quarter amounted to approximately $600,000 compared to $100,000 for the same period a year ago.

Now moving on to the balance sheet. As a reminder, the highly seasonal nature of orders creates a situation where we believe that a year-over-year comparison of cash, accounts receivable and deferred revenue will be a more relevant measurement than a sequential quarterly comparison.

We had total cash and investments of $93 million at June 30, 2010, which represented a $9.3 million increase from the $83.7 million we reported a year ago. Accounts receivable were $8.6 million at June 30, 2010, compared to $10.4 million a year ago.

Cash collections against accounts receivable were $25.7 million during the quarter versus $23.3 million a year ago. There were no bad debt write-offs.

Total current and long term deferred revenue at the end of Q1 was $53 million compared to just over $50 million a year ago or an increase of 5%. The company has no debt outstanding.

As a result of issuers calling securities and exercising our put option and us exercising our put option, our auction rate securities portfolio has decreased from $5.6 million at June 30 to a current position of $300,000. We expect to have completely exited these securities by September 30, 2010, thereby receiving full liquidity of our original $14.6 million investment and realizing no losses on these securities.

On the employee front, worldwide headcount at March 31, 2010, was 358 compared to 360 employees a year ago. On July 1, 2010, the company had 641 employees in the combined company and had committed to the implementation of a reduction in force of approximately 80 employees or between 10% and 15% of the combined employee workforce in connection with the completion of the merger.

We would like now to provide initial combined guidance for the next two quarters through our new fiscal yearend December 31, 2010. We expect non-GAAP revenue, which will be adjusted for the expected write-down of deferred revenue, to be between $80 million and $82 million and non-GAAP fully diluted earnings per share to be between $0.14 and $0.16. This is based on weighted average shares outstanding of approximately $56 million and a non-GAAP tax rate of 40%.

With respect to our recent merger with Symyx, we have completed our integration planning efforts and have begun executing on that plan. The aforementioned guidance reflects anticipated cost synergies at the high end of our previously announced annual range of $10 million to $15 million net of revenue to dis-synergy.

With that, I will turn the call back to Max.

Max Carnecchia

Thank you, Michael. As I mentioned at the start of the call, a key focus of the quarter was our merger with Symyx Technologies. In the midst of the merger and integration planning, both teams stayed focused on delivering on their respective operating plans.

In June, we released the Materials Studio collection for Pipeline Pilot. This collection represents the first integration between Accelrys' Pipeline Pilot and Materials Studio, extending the platform to include key materials modeling and simulation tools. This is a significant step as it further strengthens the relevance of the platform outside of life sciences by broadening the science available and enabling R&D organizations to integrate predictive analytics for materials properties seamlessly into their scientific workflows.

Also, in June, we held our Asia Pacific User Group Meeting in Tokyo, Japan and Seoul, South Korea. Each of these meetings had record attendance. Within the program itself, we extended beyond the materials science focus, placing more emphasis on products within the portfolio that have been successful in other regions.

A clear highlight of the quarter is our merger, a strategic combination that creates the undisputed industry leader in the scientific informatics software sector, which is more than three times the size of our nearest competitor.

New software solutions are urgently required to address fundamental changes in the industries we serve. Our combination with Symyx offers the most comprehensive portfolio of products for our target customers, uniquely positioning us to help them meet the challenges they face and to create value for our stakeholders.

The combined company now has over 1,350 customers, including 29 of the top 30 biopharmaceutical companies, all five top chemical companies, all five top aerospace companies, three of the top five consumer packaged good companies, a number of top government agencies as well as many top academic institutions.

The newly combined company has greater scale and scope through our combined resources, capabilities and financial strength. Following the merger, Accelrys is an even more financially stable company with a strong cash position and no debt that is well positioned for sustained profitable revenue growth.

Over the past quarter, our teams developed robust integration plans, ensuring that we can hit the ground running once the merger had closed. The go-forward management team is in place, and the objective of our plan is to go into the next calendar year to start of our new fiscal year with all integration activities completed and the people, processes and systems we need to be successful in place.

To accomplish these adjectives, we are in the process of developing an integrated product roadmap, and I am pleased with our progress and anticipate that exercise being completed in September, at which time we will kick off a customer road show.

I'd like to conclude by saying that we're obviously enthusiastic about this merger and we look forward to reporting our progress going forward.

With that, I'd like to ask the operator to open the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chad Bennett with Northland Capital.

Chad Bennett - Northland Capital

Can you give us some insight into where cash would be for the combined company today or at the end of June or whatever you want to use?

Michael Piraino

We expect cash on a combined basis to be around $160 million. Now there are still some bills that are clearing for professional services and so on, and we've got severance payments to make over the next six months. But it will land right around the $160 million.

Chad Bennett - Northland Capital

And then the Pipeline Pilot deal that you talked about, I assume it was a bigger deal, some consulting work and a license deal that kind of slipped from this quarter. Can you give us any idea of how big that was?

Max Carnecchia

To be clear, it's a deal that obviously from a contractual perspective had already been committed and it's work that we are doing. The net of it is the revenue is basically hung up on our balance sheet relative to completing certain milestones. It's a greater than six-figure order.

Chad Bennett - Northland Capital

You talked about Pipeline Pilot kind of crossing over the 50% mark in terms of bookings, maybe revenue. I assume because it grew in line with expectations. Were they closer to high 50s, 60s or something like that?

Max Carnecchia

Let's back up and remember that we're just talking about Accelrys. The quarter formally known as Q1 fiscal period for Accelrys is traditionally our smallest quarter of the four quarters. You'll remember that it's on the order of approximately 12% of overall orders and that the big renewals for Pipeline Pilot typically happened in the December and the March period.

So trying to extrapolate out more Pipeline Pilot being greater than 40% or 50% of the overall business is difficult to do just on the back of Q1's performance. Having said that, Pipeline Pilot performed as we expected in the quarter.

Going forward, we're not going to be able to say it's greater than 50% of the order, at least any time soon, because obviously now we've got all the bookings and orders that'll be coming as a result of the products associated with Symyx.

Chad Bennett - Northland Capital

The combined guidance for the next couple of quarters, the $0.14 to $0.16, so that includes or implies that you're at the high end of your $10 million to $15 million synergy range?

Max Carnecchia

Yes.

Chad Bennett - Northland Capital

And the 40% tax rate, Michael, is that reality going forward?

Michael Piraino

Well, there are a couple of comments I should make relative to the tax rate. The first is the actual effective book tax rate won't be finalized until we complete the purchase allocation, which we're in the middle of. So we've got to identify all the intangibles, fair values of the Symyx balance sheet and move forward. That will create some items which will affect the tax rate.

The rate that we've assumed in here I would view as being a very conservative book rate. And I think the last piece, which is really kind of what you're driving at, with some NOLs shield even on a combined group, you would expect the cash tax rate to be somewhat less and it will be somewhat less. It's subject to further review, but my estimate right now of the cash tax rate will be closer to 30%.

Chad Bennett - Northland Capital

And the revenue dis-synergy that you're baking in, that has not changed since we talked or you talked to the public?

Michael Piraino

No, our expectations or forecast to that has not changed.

Chad Bennett - Northland Capital

Symyx, I'm just trying to wrap my arms around the guidance, the revenue guidance, $80 million to $82 million. So less than 5% dis-synergy, are we implying that the combined business is kind of flattish year-over-year? I'm just trying to wrap my arms around kind of how the business would look on a comp basis the next couple of quarters.

Max Carnecchia

The way you want to think about this is we've just done the transformational combination, two very significant companies in this category, the two leaders in this category coming together. Last quarter, we spent a lot of time on the integration planning, then we spent the better part of the last 35 days jamming through a lot of the integration execution and a lot of the budget and operating plan harmonization.

The guidance that we're providing is what Michael and I consider reasonable guidance. We wanted to make sure that we weren't getting ahead of ourselves here. We got a lot of this business that is from a formal perspective new to the go-forward management team either one way or the other, and we wanted to be conservative in the way we approached it.

Chad Bennett - Northland Capital

So nothing changed in terms of your expectations of Symyx or the combined company? You still think this is a growth business looking out a year-plus once we've integrated everything, correct?

Max Carnecchia

Yes. The focus of the team here for last month and the next five months is really making sure that we get the integration right. And I mean that certainly from the cost synergy's perspective, but more importantly from ensuring that we've got the right organizational structure, we've got the right people in the boxes, we've got the right systems and processes to support them, not as Accelrys or Symyx, but as the new combined company and really putting us in a position to go into January of 2011 with exactly that organic and inorganic growth in mind.

Michael Piraino

We talked about this before, but we're doing that and at the same time being acutely aware during the integration process of our customer facing activity, which is professional services and the sales group obviously and obviously customer support. So enjoying the highest level of attention and priority.

Operator

Your next question comes from Raghavan Sarathy with Dougherty.

Raghavan Sarathy - Dougherty

First, a clarification question. Mike, when you talked about the order growth for the first quarter for the Pipeline Pilot, you made some comments regarding same quarter last year. Can you help me understand what exactly happened last year same quarter and you're excluding that?

Michael Piraino

In the year-ago first quarter, we had a very large pharma transaction where the contract itself called for a usage portion of the order, which is essentially kind of backward looking at the catch-up or true-up or however you want to call it. So the amount that went into orders for the first quarters of last year for this account is really the cumulative effect of a number of quarters that's based on this catch-up or usage.

When we renegotiated that contract this year, when it came up for renewal, it did not include, basically because the customer wanted to take a different approach at the contract. He didn't include the usage components.

So what we're trying to do in terms of calculating the growth rate is set those two orders on an apples-to-apples basis and essentially move the usage component out of the comparative quarter.

Raghavan Sarathy - Dougherty

In terms of seasonality, now that you have Symyx on board, you talked of your seasonality for your business with regards to Symyx. Do they sell like the term license that you do? How does it work in terms of what do they take for Symyx?

Max Carnecchia

As you recall, the Symyx businesses the licenses are primarily perpetual licenses. However, they've got a very significant install base. And so there subscriptions for the maintenance against previously licensed perpetual contracts as well as the content business that we'll be inheriting is also a subscription business; those are annual rights to used content.

Raghavan Sarathy - Dougherty

So is it then fair to assume that traditional sort of enterprise software type of seasonality for Symyx business?

Max Carnecchia

I think you can assume that for the license bookings. On the maintenance renewals and the content renewals, it's slightly different because those renewals would be synchronized off one quarter. So if big renewals are scheduled to our eclipse on December 31, you are going to get the renewal. In January, February, you're going to collect the cash in that period as well.

Michael Piraino

The other thing that I would point out is even though they do sell perpetual licenses, they do not have VSOE on any undelivered element. And as a result, by default are forced into subscription accounting. So although you might see at this cadence that Max refers to on a bookings basis. From a revenue perspective, you won't see that. We would account for one of their perpetual licenses sales exactly the same ways we would account for a subscription sale here.

Raghavan Sarathy - Dougherty.

You said your guidance for the back half of the year assumes cost synergies at the high end of the $10 million to $15 million. If I recall correctly, I thought you would need like six months time or so before you start to realize the costs synergies.

Michael Piraino

Well, the transaction period, or I guess what we could refer to as the cost synergy period is July 1 to December 31. We did it now in connection with the merger on July 1, that there will be closed to 80 people leaving the business. Some left on the first day; others relieved as they transitioned their responsibilities to the go-forward company. So those get phased out over that period of time, and are completed before December 31. So there is essentially kind of phase in period, as least it relates to the head count component.

Operator

(Operator Instructions) Your next question comes from (Gale Hamister) with Chesapeake Partners.

Bryan Long - Chesapeake Partners

It's actually Bryan Long from Chesapeake. You've got roughly $3.00 a share in net cash, and I was curious what are your plans to deploy that cash and what's the timeline for doing so?

Max Carnecchia

Obviously, we're very proud of the fact that we've got all that cash. It's hard earned. The genesis behind coming together with Symyx as we've shared with you and our other investors and our customers, is not a one time combination. Well, we're very excited abut this combination. It's more the beginning than the culmination of something.

And we believe that the scientific informatics market for software and services is right for consolidation. And so what you will see us do in addition to being laser focused on getting the cost synergies between here and December 31 in setting our sales up for calendar year 2011, is very aggressively going out and finding targets. Finding the right types of capabilities that will help us accelerate our product roadmaps, our services roadmaps into white space, where we determine it's more efficient or more prudent for us from the time to market to acquire capabilities, customers, domain expertise as opposed to try to develop it organically.

And so the very substantial cash balance that we have will be used to do that in a very consistent way.

Michael Piraino

The only thing I would add to that Bryan, we've established as both Max and I have done in our previous lives at other companies, but we've established some pretty strict acquisition criteria, which involved making sure we screen assets from a technology perspective, functionality perspective, customer and geography perspective, and then of course kind of the obvious metrics of accretion and return on investment.

So we would apply those metrics appropriately as we're looking at these opportunities.

Bryan Long - Chesapeake Partners

You're obviously integrating a very large transaction, a transformative transaction, and I imagine that will require some significant management time. I would be surprised if you were able to go out and do significant acquisitions to the order of using up a significant part of that cash balance. If you really believe in the value of the business that you're creating, you should be out there using a significant part of that cash to buy back your own shares at these levels. Why aren't you doing that?

Max Carnecchia

Also I think that the premise of the way you keep that up, I don't know is necessarily something that I would agree with. While it is a transformative combination, and we are going to be very focused on that we're not going to let ourselves be distracted by acquisition targets or evaluations.

At the same time, we can't lose track from the fact that these things they don't happen, they don't unfold necessarily the way you write them up on a white board or put them in a business plan. They become very opportunistic. And so I think it's too early to kind of write off the idea that we're not going to do significant additional acquisitions over the course of the next two to three quarters.

What I can tell you is, the idea that we have a significant cash balance on our balance sheet is something that we make our board of directors aware of, and the alternatives as to what can be dome with that is considered in every board meeting.

Operator

(Operator Instructions) And there are no further questions.

Max Carnecchia

Let me close just again by thanking everybody for their time and attention and reiterating how excited we are to be moving forward. And we look forward to reporting our progress in approximately 90 days from today.

Operator

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

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