Simulations Plus' (SLP) CEO Walt Woltosz on Q1 2017 Results - Earnings Call Transcript

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Simulations Plus, Inc. (NASDAQ:SLP) Q1 2017 Results Earnings Conference Call January 9, 2017 4:15 PM ET

Executives

Renee Bouche - Investor Relations

Walt Woltosz - Chairman and Chief Executive Officer

John Kneisel - Chief Financial Officer

John DiBella - Vice President, Marketing and Sales

Ted Grasela - President

Analysts


Renee Bouche

Happy New Year everyone. It is Monday, January 09, 2017 and on behalf of Simulations Plus, I welcome you to our First Quarter and Fiscal Year 2017 Financial Results Conference Call and Webinar. Presenting this afternoon will be Company President Ted Grasela; Vice President of Marketing and sales, John DiBella, and Chief Financial Officer John Kneisel. Also joining us from Auburn is Chairman and CEO, Walt Woltosz.

An opportunity to ask questions will follow today's presentation. [Operator Instructions] This call is being recorded for playback at our website www.simulaitons-plus.com. Before starting today's presentation, we’ll begin with our Safe Harbor statements. With the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the company could differ significantly from those statements.

Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel and the company's ability to sustain or improve current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

It is now my pleasure to introduce John DiBella, Vice President of Marketing and Sales for Simulations Plus.

John DiBella

Thanks a lot, Renee. Happy New Year everyone and thanks for taking the time out of your busy schedules today to learn more about our financial performance in Q1. John, Ted and I will discuss the details as we go forward, but I wanted to set the stage here first with a few highlights.

As a brief reminder, we provide modeling in Simulations Solutions both software and consulting support for the pharma, biotech, chemicals and consumer goods markets. Our solutions pan the earlier stages of drug discovery, when chemists first begin sketching molecules and progress through preclinical development, safety research, phase 2 and 3 clinical trials and post patent to support generic drug companies.

In Q1 our revenues were up 12% to $5.42 million versus the first quarter in 2016. On a really exciting note, our Buffalo Division celebrated a record quarter in terms of revenues due to the strong consulting pipeline that Ted will discuss in more detail coming up. A nice development was seen in that the 23% increase in net income and a 22% increase in diluted earnings per share were realized from that 12% topline growth.

Our software renewal rates were within their historical norms and we added 28 new software clients in Q1. And to meet this current demand for our consulting expertise and also for licensing of our technology, we are actively recruiting to add experienced modelers and software developers to the Simulations Plus family.

Next slide please. Our relationships with regulatory agencies remain very strong as the U.S. Environmental Protection Agency, U.S. Centers For Disease Control and Prevention, and the Beijing Centers for Disease Control and Prevention all added licenses to our software in Q1. And of course we also made very good progress on our funded collaborations with the U.S. FDA Office of Generic Drugs on the development and validation of models for ocular and long acting injectable delivery of drugs. Both of these grants were renewed and we are set to release the first models from these collaborations in our next version of the GastroPlus and DDDPlus.

Next slide please. Finally, this is a slide we like to show that should put a smile on long-term investors' faces. Here we see the SLP stock performance over the past two years when compared to the Dow, NASDAQ and S&P 500 indices. And as you can see, the SLP stock is up over 41% since January 2015 whereas the major indices are up only 10% to 20%. This growth coupled with dividend payouts and in general our story makes our company a very compelling investment.

I'm now happy to invite John K to give an overview of the company's financial performance. John?

John Kneisel

Thank you, John. The consolidated net revenues like John said were up 12% to $580,000 to $5.42 million for the first fiscal quarter of 2017 over last year. It's really a pleasant increase. The Buffalo Division was 1.72 this was a really nice jump for them this year. It was not a pleasant surprise but it was just a great job of bringing in more revenue with the new contracts that they have been working on. So we're very pleased with that, we're really pleased with that increase.

During this quarter our consolidated gross profit as a percentage actually decreased 2.3% to 75.3%. Most of this increase was labor related as we ended up allocating more time and labor to increase studies, contracts and training programs in the first quarter. There was also increased software amortization and some direct contract related expenses in the quarter. However, overall consolidated gross profits increased about $330,000 or about 8.7% to $4.08 million in the first quarter compared to $3.76 million in the first quarter of 2016.

The Lancaster division accounted for about $160,000 of the increase which came mainly from increased software license sales and related study revenues, while Buffalo contributed about $167,000 of the increase. During this period of time SG&A expenses increased about $187,000 or 11.2% to $1.86 million. That increase was pretty substantial, but as a percentage of revenues it actually decreased to 34.6 from - 34.4 from 34.6 the prior year. Most of the increase this year was in professional fees. They were up $152,000. This is our first quarter's cost was mainly the result of the company's transition to an accelerated filer status and the cost of the company's first Sarbanes-Oxley internal control audits and audit related cost. There were really no major decreases in any significant categories in SG&A during the period.

R&D expenses were actually down this period of time. Most of that was labor related. Costs were down mostly for allocation of labor to other categories during this time period. On another note, if you're looking for other income on this slide down below it's not there because it really didn't help much in the way of other income this period of time.

Quarterly income from operations before income taxes is up about $250,000 or 14.6% for the year and our provisions for income taxes this period was actually fairly flat in comparison to last period we were about 30.8% as an effective tax rate and the prior year it was 35.6%. The rate was fatter this year due to some deductions we received for some stock compensation expenses. All of last year our tax rate was about 32%, though we generally anticipate about a 33% rate.

Bottom line net income increased by about $255,000 or about 23% in this first quarter to $1.36 million from $1.11 million in 2016 and net earnings from our Lancaster Division were up about $162,000 or 17.6% to $1.08 million and net earnings for Buffalo were up $94,000 or 49% to $188,000 for the first quarter.

Our earnings per share as John indicated earlier increased 22% or about $0.014 per share at $0.078 a share from $0.064 a share the prior year and lastly our earnings per EBITDA increased about $260,000 which is relatively consistent with our increased pretax income for the quarter.

Moving on, consolidated revenues, if you look at the dark blue bar shows the effect in 2015 of the Cognigen acquisition and you can see the continuing quarterly growth every quarter from there on. Actually feels and see just the continuation that we show every quarter on the net income here. We can - first quarter you can see the dark blue line going back there it was just 0.53 that was somewhat of an anomaly from the cost of the acquisition that year, otherwise it would have been up from there. Outside of that we're pretty much showing a pretty good growth every quarter, every period.

Moving to consolidated net income, as diluted earnings per slide, this one, the – I want to catch up a little bit, that is consolidated net income thanks and we see the same trends over and over as we go through the slides. Going to the next slide, thank you. As expected, earnings per share are tracking with the income and we see a few in our fourth quarter every year we see a few anomalies due to the lower earnings that we tend to have in the fourth quarter as it tends to be our low year, but again we tend to have fairly consistent growth every quarter.

So, next slide please. And EBITDA tends to flatten out as we go as we get rid of the stabilizers from our models very stable cash and earnings from an EBITDA standpoint.

Next slide please. A couple of items on this slide, the company is fairly judicious with its cash. Over the last three years, starting about 14.2 you can see where we used cash for a couple of strategic issues. One, we renegotiated our major royalty agreement with TSRL that was associated with GastroPlus. That agreement really set us on a good path going forward for stabilizing our royalties and probably will pay off itself out of operations over the next from eight years from that date approximately and we actually used our cash to acquire Cognigen, which has been a great deal for us.

If you look along the bottom bars there, you will see that in the last three years we've actually been paying out dividends on a stable rate of about $0.05 a share to the customers, not customers, shareholders of the company and so we've maintained real stable rates. The board has been rewarding its shareholders for its consistency over the years and we still are sitting with $7.7 million of the cash available for strategic initiatives and we still fund our operations with no outside borrowing for any reason at this point. We just consider ourselves poised and ready for the future.

When we look at our balance sheet we're very – we feel that we are very stable and not only liquid but well capitalized for a software company and no need of debt in any way shape or form at this point. And with that, I'll turn it back to you John.

John DiBella

Okay, thank you John. In case we have anyone new to the company online today, I'd like to just briefly describe our solutions and where they fit in the drug development process. In a nutshell, we offer model driven end-to-end solutions which span from early discovery going through clinical development and into regulatory filings. Our Cheminformatics software consisting of the ADMET Predictor, MedChem Studio and MedChem Designer platforms allow research scientists to design new compounds and virtually screen them across the spectrum of properties really helping to prioritize testing as we go downstream.

The simulation software consisting of GastroPlus, DDDPlus, MembranePlus and the new PKPlus platforms help scientists model and predict complex in vitro experiments and ultimately the in vivo exposure that's seen and measured in animals and humans. And KIWI is a cloud-based validated platform for managing and communicating pharmacometric projects and results. And as you should be well aware of by now these software tools are complemented by a team of expert scientists who provide model driven consulting support on a project by project basis.

Diving a little bit deeper into the products themselves, our software development team is working very hard on new releases of all programs. The next version of GastroPlus, which is our flagship product, should be released very soon. This version is going to include a new optional add-on feature for intramuscular dosing and also enhancements to our recently released biologic module which we expect will help deliver more sales and that features and go forward.

ADMET Predictor 8.0 was released in August and the improvements made to the user interface has been very well received. We also incorporated many of the key features from our MedChem Studio program to really help streamline many of the common Cheminformatics activities that chemists and medicinal chemists in particular are going to perform. Version 8.1 of ADMET Predictor with 64-bit compatibility and rebuilt toxicity models is expected to be released very shortly and we hope these improvements help us continue to penetrate the Medicinal Chemistry Drug Safety Departments, especially at companies that work with large data sets.

We expect to release the next generation of our in vitro simulation tools, DDDPlus, MembranePlus sometime in the middle of 2017. We hope these changes to the programs which were requested by prospects and current users will lead to continued growth in their sales. And then finally, we did release the standalone PKPlus platform in late August and while the first quarter of sales were a bit below our internal expectations, we continue to have a solid number of active evaluations in the pipeline and have received some very good feedback on desired improvements. Our software development team for PKPlus is expected to address them in the next version 1.5 which is slated for release in a few short months.

Next slide please. John has already discussed the company's strong performance in Q1, here I'd like to describe a few more highlights. Our consolidated software revenue growth for the quarter was over 7% which was driven by new license sales to companies across several markets and also our ability to maintain historically strong renewal rates. There was one company that unexpectedly removed licenses from one site due to a reorganization and a new order from a commercial company was expected to arrive by November 30, the end of our first quarter that slipped into the second quarter. Otherwise we would have seen double-digit growth in software revenue.

Consolidated consulting revenue increased over 21% in Q1 as we engaged with 13 new clients on projects and had quite a bit of work coming in from existing customers. The pipeline remains full and as mentioned earlier, we are looking to hire more staff to meet these increased demands for support.

As you can see on the bar chart in the upper right corner we were essentially flat in terms of the number of software units that were licensed this quarter compared with 2016. And this is due really to one nonprofit group that had a relatively high number of licensed units that has decided to spread their renewal of licenses across several quarters as opposed to recognizing them all in the first quarter like they did last year. So the total amount of revenue from this nonprofit organization is relatively low, but they did have a relatively high number of licensed units.

We did add 28 new software clients including 14 commercial companies. This was very exciting for us including a couple from India and China, local pharma companies there. And as a reminder, for us the definition of a new client is either a brand-new company or an organization which – a brand new company which has never licensed before or an existing group that has added licenses in new departments or research sites. And as you can see from the pie chart in the lower right corner, for the quarter software license revenue was approximately 62% of the total with consulting and training services making up the remaining 38%.

Next slide please. We continue to see a really nice distribution of software license revenue globally in the first quarter about half of it coming from North America, the rest split between Europe and Asia. In particular, this was a strong quarter in China and India for us, stronger at least compared to last year's first quarter as several local pharma companies added licenses in those territories. We do continue to recruit distributors in India and Korea to strengthen our local presence there and we do continue to also look to expand sales operations on the East Coast.

Next slide please. Finally, in terms of marketing activities, our new website is now live. It was launched in the beginning middle of November and the marketing group with assistance from members of the R&D staff continue to update content to better inform visitors of our full suite of solutions. Additionally, our scientists were busy attending and presenting at numerous conferences and hosting on-site training summer seminars around the globe.

We had a very successful workshop week in Bethesda, Maryland near FDA offices training on both our PBPK modeling and also population PK data analysis solutions. And we're going to continue with a very aggressive workshop schedule and 2017 both for industry scientists and also we're going to be making a number of visits to universities as well this year as educating more scientists, more students on the technology should help with the expansion of our user base.

And finally, to help with promotional activities in general we hosted three webinars in the quarter on PKPlus and GastroPlus with a couple of hundred people registered for each one and we also maintain a very robust social media presence and continue to explore other digital marketing opportunities.

And I'm now happy to invite Ted to give an update on the Buffalo operations.

Ted Grasela

Thank you, John. As John K and John D have both pointed out, we've had a really great first quarter in fiscal year of 2017 a big part of that is recognizing the strategic benefits of working together with the scientists in Lancaster and the scientists in Buffalo to solve really very interesting and challenging problems from our clients. We've had very strong collaborations between the groups and really a big part of that is identifying new and innovative ways of using modeling and simulation to address the problems that our clients have during their research and development programs.

And it's important to recognize that those consulting projects beyond generating the revenue from the projects they in fact help to shape management regulatory decision-making process. So, that's a very virtuous cycle of demonstrating the value of these modeling and simulation activities leading to further interests and also software licensing.

Next slide please. In fiscal year 2017 right now the states we're working with a total of 26 different companies on 37 different drugs and encompassing 60 projects in total. We've had five new companies join as clients so far this year and they brought with them 19 new projects that we've initiated in this first quarter. In addition we've had two projects that expanded their scope as clients began to recognize the value of the information we were delivering and two projects were delayed because of slow trial enrollment. It just means that the timeline for when clients will be delivering data to us has been pushed out.

Some of you may recognize that we lost a couple of projects because the studies failed in late stage development in the fourth quarter and we believe that we are past some of the issues that were created by those failures in terms of revenue generation.

Lastly, we have 25 outstanding proposals from 19 different companies that were in the business of about putting together proposals for and submitting them to the client. Just as John DiBella has pointed out, we're very active in presenting our results and helping to train clients in the use of software as well as the results of our consulting efforts and so far we've presented five posters and published one peer-reviewed manuscript and had three invited presentations in this first quarter of 2017.

We're currently working on 18 publications and four conference abstracts also for publication. And again consistent with what we've been talking about over the last several of these earnings calls, the most common therapeutic area for our work is in oncology followed by neurology and immunology and could lead 25% of our projects result in regulatory interactions of some sort either as part of end of phase 2 meetings with the agencies or in the submission of new drug applications to the agency.

There were two presentations that I'd like to point out. Of note, there was a presentation of an application of our ADMET Predictor and GastroPlus software at the Japanese Society for the Study of Xenobiotics. That was a meeting in Matsumoto, Japan and it opened up a number of really interesting conversations about the value of using these two software products together in supporting drug discovery and being smarter about the drugs that we bring to later stage development.

In addition, one of our scientists presented at the European Union SimInhale Consortium Meeting in Prague and it highlighted our innovations and our software with respect to pulmonary absorption that we've incorporated into GastroPlus and enabling us to evaluate demonstrating our ability to evaluate emerging science or incorporation into future GastroPlus modules.

In terms of KIWI, this is the software product that we're developing for capturing and performing modeling and simulation on our cloud installation. We continue to work on the $4.7 million contract with a major foundation to implement KIWI platform specifically for global teams engaged in model based drug development and that we have a five-year term, coming up on the end of our first year and a continuing on contingent on satisfactory completion of milestones we believe that we’re meeting all of those milestones. We don’t see or anticipate any issues with continuing work on that.

This project builds on our extensive process related research and the funding from this has enabled substantial improvements and enhancements to the KIWI platform which we believe are going to be very important in making this even more attractive to other pharmaceutical company clients and the enhancements that we’re working on provide, will provide a scaffold with product applicability and its going to be available as I mentioned for industry clients as well as academic clients.

We currently have six active KIWI licenses and we have several demonstrations that are scheduled with different research groups including academics and large pharma to evaluate the software and we will continue to push for having more of those demonstrations.

So in summary, Buffalo Division is quite strong and growing. Our consulting activities continue to expand as we work together with the Lancaster Division for PBPK modelling and clinical pharmacology. The foundation contract to enhance KIWI platform is the major step forward in our long-term vision for the product and again there is continued interested in the academic and industry communities regarding licensing for the product.

John DiBella

Okay. Thank you, Ted. So next slide please, just to summarize we're off to a very strong start for our fiscal 2017 year as topline revenue growth was up 12% and income earnings up 22% to 23%. This growth is driven by strong performances across the company as we are in a really nice position to capitalize on the interest from regulatory agencies and utilizing, modeling and simulation in clinical pharmacology and safety research. We’re also making some really nice progress as Ted just said on the five-year $4.7 million contract we have with a large research foundation which offers potential for additional such contracts with other groups.

And finally, we believe our company is firmly entrenched as a leading provider of modeling and simulation solutions and we look forward to continuing to provide innovative new approaches to meet the growing demand.

So, thank you so much for your attention and I'd like to now throw it back to our moderator, Renée, for the questions and answers portion of today's call.

Question-and-Answer Session

A - Renee Bouche

Thank you, John. Howard Halpern has been very busy with us this afternoon. He has sent several questions. His first question concerns employees, if you find the right people how many new employees would you like to hire in order to meet future needs in fiscal year 17? I'm not sure who would answer that.

Walt Woltosz

This is Walt. As you noticed I did not participate in the presentation today. I'm trying to turn some of the activities that I had been doing for years over to the younger generation. I think they've been doing a great job here, but I would say our philosophy has pretty well been if we find a smart person with the right aptitude and attitude who wants to do this kind of work we’re in a position financially to be able to hire everyone we can find. I would not want to set a limit on it, but I would say 10% to 15% growth overall in the staff across Buffalo and Lancaster is probably a reasonable target.

There is a limit to how much time we can spend training someone who is new without diluting the efforts that we have ongoing. So, you can't do it too quickly, it's a very technical business, but very often we find there are folks out there who actually have some experience already in using our software and so there is less training required. So 10% would be about six to seven employees 15% another three or four beyond that, that would be something reasonable during the fiscal year if we can find them and we'll do it.

Renee Bouche

Thank you, Walt. Howard's next question concerns the consulting contract, he asks at what pace do you anticipate recognizing revenue from the $5 million consulting contract?

John Kneisel

I will take that Walt. That contract has specific milestones that were built into the contract and it has a pace for recognition of income, but it's not, it's not exactly a straight line, so but it mimics a little bit close to straight line, but it doesn’t quite do that, so but it's being meeting the milestones throughout it, it has a little bit of - somewhat of little bit of a bubble in the middle as we go forward, but it's just based on the different parts of the project as we go, but that's about all I can really say about it.

Renee Bouche

Okay and Howard's next question is probably for Ted, how important is the KIWI product over the next two to three years and does this product have potential applications outside of the pharma industry?

Ted Grasela

Well certainly, we have a lot of hope that the KIWI product will take off. So right now, certainly the foundation has recognized that it can be a pivotal part of its strategy for incorporating, modeling and simulation activities into variety of different research and development activities. And so for the time being we're really focused on fine tuning that and developing its capabilities for use in pharma related research.

But as everyone I think has seen, the applications of cloud computing continue to grow and we see that this type of a platform with its ability to organize complicated modeling and simulation results could very well be applicable to outside industries.

Renee Bouche

Okay, thank you Ted. Howard's last question at this moment is concerning the FDA. Do you anticipate any major changes or shift in FDA policy under the new administration?

Ted Grasela

I can take a first stab at that. I think everybody is trying to figure out what changes in every realm of government are going to be with a new administration. I certainly don’t anticipate any major changes, but having said that, the agency has clearly demonstrated over a number of years that modeling and simulation is really very important in supporting its decision making process. And that interest on the part of the regulatory agencies, not only the FDA, but also the European Union regulatory agencies as well as Asian regulatory agencies really are part of the forces that are driving sales of our software as well as our consulting revenue.

Renee Bouche

Okay, thank you Ted. I have an email that came in from Scott Bilodeau and he had a question concerning PKPlus and he asks if we could discuss the initial launch of PKPlus, how many potential customers are looking at it, any success yet and what is the pricing? John?

John DiBella

Okay, so yes, PKPlus was launched, we had the press release at the end of August officially first version for evaluation went out probably mid-September or so. We have been able to recognize around half a dozen or so sales to date and the nice thing about the sales that we have recognized is that it is distributed across small and medium sized pharma companies and also CROs as well.

I think that that is potentially going to be a nice user base for us, the contract research organizations that are doing a lot of PK studies for companies and need to utilize tools like PKPlus to analyze the data.

The software license revenue, I think we've mentioned this on calls before, but it is in the single digit thousands of dollars per year per user license and I would anticipate that the user - the potential market or user base is going to be relatively high especially in a non-validated or non-let's say production type environment. The feedback that we've gotten from several large companies that have been testing it so far is that they see a lot of potential value in the program for very quick PK calculations that have to be done.

We still have a little bit more work that would need to be done if we wanted to have this be utilized in a fully validated environment, but lot of companies see the value that our tool provides, especially the way things are streamlined, the point and click workflow to be able to do these quick calculations is something that seems very appealing to customers. So I think our focus going forward here is going to be on the use of the tool for non-validated purposes.

Renee Bouche

Well, it looks to me John like that maybe the last of our questions. It is kind of quiet start to the New Year. I don't see any other written questions. Nobody is raising their hands and I haven't any other email.

John DiBella

Okay, well again thank you everybody for the time that you've taken out of your busy schedules to hear more about our performance for this first quarter. I think overall it was a really, really nice start to the year and stay tuned for more exciting news coming from Simulations Plus as we go forward.

Renee Bouche

Thank you, John. So, that concludes today's conference call. If you missed any part of today's presentation, the reply will be available at our website www.simulations-plus.com and again thank you everybody and have a splendid New Year.

Question-and-Answer Session

Operator

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