Simulations Plus' (SLP) CEO Walt Woltosz on Q2 2017 Results - Earnings Call Transcript

| About: Simulations Plus, (SLP)

Simulations Plus, Inc. (NASDAQ:SLP)

Q2 2017 Results Conference Call

April 10, 2017 04:15 AM ET

Executives

Ted Grasela - President

John DiBella - VP of Marketing and Sales

John Kneisel - CFO

Walt Woltosz - Chairman & CEO

Renee Bouche - IR

Analysts

Renee Bouche

Good afternoon. It is Monday, April 10, 2017 and on behalf of Simulations Plus, I welcome you to our Second 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, Alabama is Chairman and CEO, Walt Woltosz.

An opportunity to ask questions will follow today's presentation. You may send your written question using the questions pane on your control panel or you may use the hand-raising feature on your control panel to ask your question directly. Please be sure to enter the unique audio PIN displayed when you joined the call. This call is being recorded for playback at our website, www.simulations-plus.com.

Before we begin today's presentation, I'll read 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, and hi everyone. Thanks for taking time out of your busy schedules today or may be away from your children's spring break. To learn a little bit more about our financial performance in Q2 and the first half of 2017. John, Ted and I will discuss the details as we go forward, but I wanted to set the stage 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 Q2 our revenues were up 11% to a record second quarter $5.7 million versus the same time period in 2016. Our net income increased a little over 4% to 1.2 million. Our software renewal rates were within their historical norms and we added 20 new software clients in Q2, which I’ll talk a little bit more about coming up. To meet this current demand for our consulting expertise and technology, we interviewed and hired several new modelers and scientist to the Simulations Plus family with most of them starting in this quarter.

For the first six months of 2017, our revenues increased a little over 11% to $11.12 million and we saw nice trickledown effect on that income, which increased 14%. Diluted earnings per share is up a little over 12% to $0.15, and we have added 43 new software clients in the first half of the year. Our relationships with regulatory agencies remain strong as the U.S. and China FDA added licenses to our software in the quarter.

We also made really nice progress on our funded collaborations with the U.S. FDA office of generic drugs under development and validation of models for ocular and long acting injectible delivery of drugs. We released the first models from the LAI delivery grant in gastro plus 9.5 and additional updates to both the ocular and LAI models will be in follow-up versions to both gastro plus and DDD plus. As a reminder, these grants are win-win for us.

We form really nice relationships with scientists at the FDA and the companies that joined the many consortiums, we get access to data that we use to build and validate the models and most importantly, we receive funding to develop these new features in our software that can then be licensed to other users.

Next slide roll. Finally, this is a slide we like to show that should put a smile on both long-and short-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. As you can see SLP stock is up over 90% since April of 2015 whereas the major indices are up 10 to 20%. Our stock's performance coupled with dividend payouts and in general our story really makes us a compelling investment and we have over a decade of really strong growth to back things up.

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

John Kneisel

Thank you, John. This quarter, I'll go with the first quarter first and then we'll cover the next six months or the six month period time. The consolidated net revenues were up 10.5% or 540,000 to 5.7 million in the second quarter this year from 5.16 the prior year. The net increase was due to $394,000 increase in revenues at our Lancaster division, which represented our 10.8% increase over 2016. We saw an increase of a 148 or 9.7 or 10% increase in our Buffalo division to 1.6 million in 2017 from 1.5 in 2016.

Consolidated software and software related revenues were up 297,000 or 8.4% while consolidated consulting and our analytical study revenues increased 245,000 or 15% over the prior year. Gross profit increased 250,000 or 6.5% to 4.15 million from 3.9 million the prior year. Our Lancaster division accounted for 256,000 of the increase which came mainly from software licenses and study revenues while Buffalo remained basically constant from the prior year.

Consolidated gross profit as a percentage of revenues decreased 2.3% this period from last year. This decrease came mainly from increased labor costs. Those areas were increased employee bonuses declared by the Board of Directors based on the higher earnings in 2016, and then the associated costs with associated cost of labor related to increased steady revenues and contracts and some increased training programs we ran this quarter that we didn't run the prior to year.

We also saw an increase in software amortization this year as we did some releases during the period, which increased labor -- amortization cost. And at our Buffalo subsidiary, we incurred $65,000 worth of direct contracts labor expenses or labor-related expenses for our large contract there, which had about a 4% impact on their divisional gross profits for the quarter, dropping their gross margin to 50.3% for this quarter, sort of an unusual event for us at this point, but that's going to be a hit and miss thing once in a while there.

SG&A expenses were up 225,000 for this quarter or up 13% to 1.95 million in 2017 from the prior year. Those major increases were in salary and wages. Our annual salary increases occurred in this quarter, and also, we have higher bonuses. We pay our bonuses every December based on the prior year, so those -- any increases catch in this quarter. We also had increase in our non-cash stock compensation cost and we had a higher percentage of G&A allocated to labor by our scientific staff.

Our professional fees increased about 109,000 this quarter. Those are up mainly due to the Company's transition to our accelerated filer status, cost of the Company's Sarbanes-Oxley internal control-related cost as well as some additional accounting and compliance and legal costs associated with review of our proxy or 10-K. We did our new equity incentives stock option plan and review of corporate documents by legal counsel. In addition, we incurred consulting cost associated with review of strategic initiatives and other legal documents during the period. We had a couple of one major decrease in selling expenses during the quarter as we didn't go to many trade shows, and last, we're working on our websites.

R&D expenses during the quarter decreased $50,000 tough this year during the quarter we spend about the same amount of money on R&D -- overall R&D expenses what we did last year. Just the comparison of the amount that was expensed compared to capitalize was a little bit lower. Our net incomes decreased by $50,000 -- or increased, excuse me by $50,000 or 4.4% during the period to 1.2 million from 1.15 to prior year.

Net earnings from Lancaster were 62,000 or 6.2% to 1.06. And net earnings from Buffalo division decreased slightly by $12,000 in the period. Our quarterly effective tax rate, for those of you who follow the tax rates, increased just slightly to 33% for the quarter. We'll talk a little more about income taxes six months in a minute. Diluted earnings per share increased 3.4% and are reported as $0.07 for the quarter, $0.069 to be little more precise. EBITDA was up 5.7% to 2.3 million for the second quarter.

Next slide please. A second here. For the six months, consolidated gross profit was up $600,000 -- or excuse me, consolidated net revenues were increased 11.2% or 1.12 million to 11.12 million for the first six months. The 442,000 of this increase was from revenues generated in Buffalo, representing a 15% increase over last year. Revenues at Lancaster increased 679,000 or almost 10% to 7.74 million from 7.1 million the prior year. Consolidated software and software related sales increased 528,000 or about 8%, while consolidated consulting and analytical revenues were up 593,000 or 18% for the year.

Consolidated gross profit increased 600,000 or 7.6% to 8.2 million in the six months period of time. The increase in margin is 160,000 of it was from Buffalo, which showed a 56.3% margin during the period. And Lancaster accounted for 416,000, showing an 81.8% margins for the period. Gross profit did decrease 3.3%, and that came from the same sort of source of expenses and consolidated labor increasing because of bonuses and additional allocation for the expenses for contract studies and amortization of software and direct contract-related expenses.

SG&A, again, we had increases in our labor cost and stock compensation costs for the stock of the non-cash expenses associated with issuing stock options over the last couple of years and a higher percentage of G&A expense for the scientific staff spending time on G&A-related matters.

The professional fees again were up for the quarter as we moved into accelerated filer status, as spending time on Sarbanes-Oxley-related issues, equity incentive plan, legal costs and consulting costs. We had major -- the one major decrease again is our website redesign and selling expenses were down in the six months. Again, our R&D we're basically about the same amount of spend during the period and had a basically amount -- same amount of expense for the period for R&D expense.

Our provision for income taxes isn't basically shown on this slide, but you can -- you'll be able to see you what went on with it on the Q that will be filed right after this call today, but our effective tax rate actually will decrease to about 31.9%. It will be down from about 34% the prior year. That's going to be mainly due to the effect of some stock-based compensation transactions that occurred during the period.

I've also had some calls lately about our deferred tax liability on the balance sheet. It's around $3 million at the last filing end of our Q and specific questions that I've been getting is to how that liability might turn around and require some cash payments for taxes. Effectively, there's no anticipated short-term turnaround on that liability, the required tax payments or cash payments and taxes announce.

Just a little bit more color for those of you who might want that. There's a substantial portion of that liabilities is tied up in 2 balance sheet items. One is the agreement that we signed 2.5 years ago with TSRL on the royalties. We received a fairly large tax benefits while we're paying out the payments, the last one which is at the end of this last month, we make our last $1 million payment. We're actually getting tax benefit for those payments upfront. And then as we amortize out those expenses over the 10 years of the agreement, we will end up paying taxes on that expense because it won't be deductible on our tax returns.

So that will -- goes out about over the next 7.5 years that we'll be actually paying a little more tax than what we'll show on the books. And so it's a longer-term period. Same as the other items are capitalized software where we have liability for that and that sort of refreshes itself all the time as we capitalize more software and then we -- versus the amortization expense in our software. So hopefully, that will answer the question.

Net income for the period was an increase of 310,000 or about 13.6% to about 2.56% for the six months from 2.25%. The increase comes from revenue growth in both divisions. Net earnings for our Lancaster division was 224,000 or 11.7%, and net earnings from Buffalo increased 82,000 or 24% or 421,000 in this period. Our diluted earnings per share increased 12.3% and are reported as $0.15 a share for the six months, up from 13% -- $0.13 the prior year. Our EBITDA is up 19% or 4.79 million for the six-month period ended December of '17.

And next slide. As you can see, we've shown some relatively good quarterly growth of actually -- and talking with some of the people lately, they've talked about how we've had some lumpy revenues or whatever, but really haven't, you can see the quarterly trend. Trends are fairly consistent as we've gone forward.

Next slide, please. And same thing with net income, we do get some a little bit of jumps and bumps, but it all depends on how revenues pop in. And if we have some extraordinary expenses, they hit once in a while.

Next slide. Same thing with earnings per share. Earnings per share is a little level this period due to a little bit higher expenses or as you can see in the third quarter of last year, I think we had some revenues that popped in, in the third quarter of that prior year. So it leveled it off.

And next one. And same thing, EBITDA goes up and down based on the same thing with revenues and expenses.

Next slide, please. Again, this slide talks about our cash. We're always looking for things to do with our cash and maintain our cash balances. The blue bars across the bottom are our dividends. We've been paying dividends very consistently over the years, giving back to our shareholders as best as possible while trying to maintain cash for looking for opportunities, have used our money to pay out TSRL, which has set us up for the future to be royalty free, so to speak, as best as possible, and the acquisition of Cognigen, which has been very helpful for the Company as well, and still maintain the cash where we're at for opportunities.

Next slide. Looking at the balance sheet items we've got, where that maintained really a strong balance sheet, a lot of equity, lot of dollars available and to the shareholders and still maintain the ratios that we need to for the future.

Next slide. And I guess I'll turn it back to John.

John DiBella

Okay. Thank you, John. In case we have anybody new to the Company online today, what I'm going to do here first is just briefly describe all of our solutions and where they fit in the research and development process.

In a nutshell, we offer model-driven end-to-end solutions, which span from early discovery through clinical development and regulatory filings. Our cheminformatics software, which consists of the ADMET Predictor, MedChem Studio and MedChem Designer platforms on the left, 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 the flagship GastoPlus product, along with DDDPlus, MembranePlus and the PKPLus platforms, help scientists model and predict complex in vitro experiments and, ultimately, the in vivo exposure that's likely to be seen in animals and humans. And KIWI is a cloud based validated platform for managing and communicating pharmacometric projects and results once we get into the clinic. These software tools are complemented by a team of experts who provide model driven consulting support on a project by project basis.

Next slide. Diving a little bit deeper into the products themselves. Our software development teams have been working very hard on new releases of all products. The new version of GastroPlus, the flagship which is responsible for about 65% of the software revenue, was released just last week. This version includes a new optional add-on feature for intramuscular dosing, which was developed through one of the funded collaborations with the FDA, and also enhancements to our recently released Biologics Module, which we really expect will help deliver more sales of that feature as we go forward.

ADMET Predictor 8.1 was released in January, and the performance improvements made especially when working on large data sets have been very well received so far. We've also incorporated, as has been mentioned in previous calls, many of the key features from our MedChem Studio program into the ADMET Predictor platform to help streamline many of the common cheminformatic activities. And this has helped us continue to penetrate the medicinal chemistry market, so the activities that are going to be done at an early stage.

We expect to release the next generation of our in vitro simulation tools, DDDPlus and MembranePlus, sometime in the middle of 2017. We hope the changes to these programs, which were requested by prospects and current users, will ultimately lead to continued growth in their sales.

And we are also working really hard on the next release of PKPlus, with version 1.5 expected within 1 to 2 months. The new items that are being implemented come directly from user feedback. And we're really excited to get this next release into the hands of scientists who are looking to bring in PKPlus and just needed a few additional items added before they can pull the trigger.

Next slide, please. John has already discussed the Company's strong performance in Q2. Here, I'd like to just briefly describe a few of the highlights. The consolidated software revenue growth for the quarter was over 7%, driven by new license sales to companies across several markets and also driven by our ability to maintain historically strong renewal rates. Consolidated consulting revenue increased 15% in the second quarter as we engage with a number of new clients on projects and had quite a bit of work coming in from existing customers as well. The pipeline remains full, and as mentioned earlier, we are excited to get our new hires up and running on projects.

As you can see on the bar chart in the upper right corner, we saw a 6% increase in the number of software licensed units that were sold for the quarter. We added 20 new software clients, including 9 commercial companies from -- with several of those being outside of our core pharmaceutical space or market. And as a reminder for us, a new client is defined as a brand-new company or organization which never licensed before or an existing group that added licenses in new departments or research sites. For the quarter, software license revenue was 66% of the total, as we can see from the pie graph in the lower right corner, with consulting and training services making up the remaining 34%.

Next slide, please. For the first half of 2017, our consolidated software revenue growth was over 7%, and our consolidated consulting revenue increased 18%, similar to some of the reasons that were mentioned earlier. We added -- so far -- well, excuse me, we've added for the first half of 2017, 43 new software clients, including new licenses at all of the major regulatory in the U.S. and China.

And as you can see from that pie chart in the lower right corner software license revenue for the first six months is about 64% of the total with consulting and training services making up to remaining 36%. We continue to see a really nice distribution of software license revenue globally with 44% of the software license revenue coming from North America, 33% from Europe and 23% from Asia in this quarter. We continue to also see some really nice growth specifically in China and India as several more local pharma companies added licenses in those territories.

Just last week we announced that we’ve entered into a new distribution agreement with a company in Korea Quantum Bio Solutions, which we expect will help drive more sales in the growing market there. Currently we have about a half a dozen organizations that license our software several universities, several domestic companies. There is probably another 40 or 50 companies that would be viable candidates for our tools and hopefully with this new partnership with Quantum Bio solutions we will be able to hit a lot more of those. And we also hope to finalize and announce something soon about a similar agreement reach with a group in India.

Next slide, finally in terms of marketing activities for the quarter, the marketing group has spent a lot of time on creating new video content for the website and this has helped us see double digit growth in traffic to our site versus the preceding quarter. Additionally, our scientists were very busy hosting workshops and onsite training seminars around the globe, we had very successful workshop week in Orlando, Tokyo and San Diego in Q2, training on our PBPK modeling solutions and also bringing in a few other software products as well beside GastroPlus.

And we're going to continue with a very aggressive workshops schedule for the remainder of calendar year 2017 both for industry scientists, but also making a number of visits to different universities as well, as education and educating more people on our technology remains a primary focus and goal for us, which should ultimately help with expansion of the user base.

And finally to help with promotional activities, we hosted three webinars in the quarter on ADMET Predictor and GastroPlus with several hundred people registered for each one. And we maintain a very robust social media presence that is seen significant increase in engagement over the past year.

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

Ted Grasela

Thanks very much, John. I'd like to talk a little bit about what's been going on here in Buffalo in terms of consulting services and our marketing activities and also where we are with KIWI.

So, we continue to realize the strategic and synergistic benefits of the acquisition and we have really great relationships and activities going on between our clients, our scientists in Lancaster and our scientists in Buffalo. And that's evidenced by the record first quarter that we had. Those strong collaborations, I can't emphasize enough that one of the reasons why clients are responding to it is that we're really showing them new ways of using modeling and simulation to get at issues that have been problematic for our clients. And so they're beginning to see new ways in which to use the software to address those issues.

And the reason why we focus -- one of the reasons why we focus on these consulting projects, is because we're looking to shape management and regulatory decision-making processes by virtue of delivering these results at the time of a regulatory review. And these projects also help drive additional consulting because we develop really good relationships with our clients. But then also, we hope that they will drive software sales as clients see the value of the work that we do and bring those software products in-house to expand their use.

Next slide, please. So far in fiscal year 2017, we're working with a total of 25 companies on 38 different drugs and under the umbrella of 65 different projects. We've engaged with six new companies in fiscal year 2017, which brought us 33 new projects. 15 projects were expanded in scope during this period. Three projects were reduced in scope because the drug wasn't looking like it was going to be very promising. And as John had mentioned before about the pipeline for new projects, right now, we have 32 outstanding proposals with 20 different companies for us to work on in the future. And so far this year, we've presented six posters, we published one peer-reviewed manuscript, three invited presentations and one book chapter was published.

Over the last year, I took a step back and then was working on developing a chapter that showed how all of our software products from those that are used earliest discovery, all the way through to the types of the modeling and simulation that get done in the clinical arena and demonstrated how they could be brought together in one cohesive continuum of modeling and simulation over the entire life cycle. And so that book chapter has finally been published, and we'll be using that as part of our educational program for potential new clients.

Right now, we're working on 17 publications and five conference abstracts to be submitted. And our most common therapeutic areas are for new medicines for cancer, followed by neurology, endocrinology and infectious disease. And in general, the majority -- the 45% of our projects result in regulatory interaction. That is the work that is being done for submission to a regulatory agency for them to consider.

Next slide. I just wanted to mention two posters that were presented in the last quarter that are interesting. At the clinical pharmacology meeting in March, we presented a poster that demonstrated how our software can be used to identify new anti-malarial drugs and then select drugs for subsequent development by virtue of being able to predict what their clinical pharmacokinetics and activity are going to be using GastroPlus and ADMET Predictor. And so that was a really very interesting poster.

It got a lot of interest at the meeting, and several possibilities for future collaboration came from the discussions around that poster. We also had another poster looking at the support we provided for a new antiepileptic drug in pediatric populations, and this post really demonstrated very nicely how extensive modeling and simulation can be used to ensure the safety and efficacy of new products in a very fragile population.

Next slide. Next slide, and in terms of our engagement with the scientific community, which is a really important basis for demonstrating both the quality of our work and the utility, I'm very pleased to announce that Jill Fiedler-Kelly, who is the Vice President for Modeling and Simulations Services at Buffalo, has been appointed as a member at large to the American Society for Clinical Pharmacology & Therapeutics. So she's on the Board of Directors there for a three year term. This is the largest scientific and professional organization that provides services to the clinical pharmacology and translational medicine disciplines. And so Jill now has an opportunity to contribute and to help shape the future strategies and direction of that very prestigious organization.

Next slide, lastly, in terms of KIWI update, we continue to work on the $4.7 million contract from the foundation that gave us the money to implement a platform for global teams engaged in model based drug development. This is a five year term contract that's contingent on satisfactory completion of milestones, which we are well on our way to meeting. This project builds on our extensive process related research and the funding is enabling substantial enhancements to the KIWI platform as it currently exists. It is our plan to use these enhancements not only for the development of particular drugs that have interested the foundation but then they also provide a scaffold for us to market with broad applicability to other academic and industry clients of KIWI.

We currently have eight KIWI licenses and have several KIWI demonstrations that are ongoing with different research groups ranging from academics to large pharma. This contract is coming up on about a year now. And the biggest part of the first year was the development of the design, specifications of business and functional requirements and engaging with some of the organizations that we'll be working with on these model based drug development programs. Those interactions with different organizations have gone very well.

We've been demonstrating the importance of the KIWI platform in terms of communication and validation of the data as well as modeling and simulation results for subsequent regulatory submissions. And so at this point, we're beginning to actively engage in the programming that's needed to bring those functional and business requirements to fruition. So we just recently hired three full time stack developers and a software quality assurance manager and they're going to be responsible for working with our internal group to get the programming done that's needed to bring this product to the market.

Next slide. So in summary, the Buffalo division is strong and growing. Consulting activities continue to expand. And as I mentioned, we're realizing synergies with the Lancaster division. We've successfully recruited and on boarded software engineers and some scientists to help sustain these growth patterns. The foundation contract is accelerating our plans for KIWI platform and development and is a major step forward in our long term vision for the product. And lastly, there is continued interest in the academic and industry communities regarding licensing the product, and we'll be providing additional demonstrations as we go forward.

Thank you. And I'll turn it back to John.

John DiBella

Thank you, Ted. So just to summarize, overall, top line revenue growth for the quarter and first half of 2017 were up 11%, and we are presenting this from different rooms, but I can see John K. smiling with my roundup skills. Also, net income for the first six months increased nearly 14%. This growth is driven by strong performances across the Company, across divisions, split between software and consulting services, as we're really in a nice position here to capitalize on the interest from regulatory agencies and utilizing modeling and simulation in clinical pharmacology, in safety, research and, of course, even earlier.

We're also making really nice progress on the five year, nearly $5 million contract with a large research foundation, as Ted just discussed, which offers potential for additional such contracts with 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 this growing demand.

Thank you so much for your attention. And what I'd like to do now is throw it back to our moderator, Renee, to handle the question and answers portion of today's call.

Question-and-Answer Session

A - Renee Bouche

Thank you, John. Howard Halpern has sent a number of questions, some of these, I think, you've touched on in your presentation, but nonetheless. His first question is, what is the potential both near and long term for your recently announced distributor agreement in South Korea with Quantum Bio Solutions?

John DiBella

Yes. So as mentioned earlier, we have today, around six organizations that license our technology in Korea. We really don't work with anybody on a consulting basis yet. Fortunately, Quantum Bio Solutions, they're a group that's been around now for well over six years, and they were founded by a professor at Korea University, who has a really strong reputation in utilizing computational tools for drug discovery but also has some experience using it a little bit further down the line with PK modeling as well. He's got a very strong network as does the rest of his team and group, and we've discussed what the potential market could be for us over in Korea.

And we've identified around 50 to 60 companies that could be viable candidates for some form of our solution, whether it's licensing software, whether it's outsourcing some work to our consulting groups. So once we get these folks at Quantum Bio Solutions up and trained with our software, I think we'll see some pretty nice results coming over there in a relatively short period of time. We'll be making a visit to Korea in July. We've already a workshop scheduled with our long-term university partner. So we're going to be going over there, hosting the workshop, and Quantum is already working on setting up a number of client visits for us to make as well.

Renee Bouche

And Howard's next question concerns the PKPlus software offering. He asked if it's gaining customer acceptance. And what can PKPlus contribute in terms of units sold over the next 2 years?

John DiBella

Okay. The first question, it is gaining customer acceptance. First six months of the launch of PKPlus, we had around a dozen to 15 companies now, I think, licensing the technology. The encouraging thing is that a large chunk of those companies are CROs, so contract research organizations that are offering PK modeling services to their clients and have found PKPLus to be a viable tool for them.

Well, I think we're really excited about this next release. So we've gotten a lot of feedback from companies who have evaluated the software, who have really appreciated the workflow, but identified a few things that were missing that prevented them from moving forward with licensing.

And I think we're going to be addressing a good chunk of those items in this next version. And I would expect to see a nice performance here coming up closing out, hopefully 2017 and going into fiscal year 2018. Realistically, I would expect to see PKPLus contributing somewhere around maybe 10% to 15% of the total units -- license units that are sold over the next two years.

Renee Bouche

Okay. Thank you. Howard's next question concerns the new customers. With 43 new customers in the first half of fiscal '17, can you maintain or exceed that pace in the second half of this fiscal year?

John DiBella

It depends. I think that getting GastroPlus 9.5 out last week is going to be a big help. That's our flagship product, and we had gone nearly 2 years between releases of GastroPlus. People were getting a little antsy, and we've come out with a new version that has really got something for everybody. And so I think we're going to see a lot of people pulling the trigger on some new GastroPlus licenses. I think the response to the ADMET Predictor release in January has been very positive, and hopefully, we'll see some new customers signing up for that product.

And then hopefully, we'll see continued sales momentum maintained with PKPLus as well, especially when that new version comes out. 43 new customers in the first half of the year is a pretty good pace. So I can't really say whether or not we'll maintain or exceed that for the second half of the year. But I would expect a nice number of new customers signing up for the technology, especially -- sorry, just enclosed for this answer, companies may be outside of our core pharma biotech markets.

That's where I'm really excited. We've had a really nice response to the solutions that we offer at the Society of Toxicology meeting in Baltimore last month. And companies that you probably wouldn't expect to be potential customers for us have really expressed a strong interest in learning more, so I think that expansion into some of these newer markets are going to be exciting to keep track of.

Renee Bouche

Okay. Thank you, John. Howard's next questions, I think, are for John K. His first is, the gross margin decreased to 72.8% from 75.5% in the second quarter of fiscal '16. Will year-over-year margin pressure continue in the second half of fiscal '17?

John Kneisel

Well, you're looking at the quarterly margin on this question, and there were a couple of items that hit this quarter that are potentially repeatable, any kind of direct cost on a contract that hit can hit again and will, at some point or another, catch in the quarter. But it's not really, they're not really designed in a quarter or we know when they're going to come in. And then again, with some of the salary issues that hit in this quarter, those are specific to the second quarter of the year, especially bonuses and some of those items. So some of those will carry over, but in particular, I don't anticipate that they will.

Again, it also depends on how sales go because sales affect the margins, Howard. So it's a little hard to predict how it will carry forward into the year, but I would assume that our normal margins would hold going forward, especially with, if normal sales patterns hold as I would expect. Hopefully, that will answer your questions, a little hard because it's really speculative. There's a lot of moving parts, depending on when contracts close on consulting projects and changes in personnel and things like that. And do you have another question? Renee?

Renee Bouche

One last question Howard asks, if you have any feel on what the full year tax rate should approximate.

John Kneisel

Yes. Howard, I tend to always use about a 33% rate. The run rate's probably a little bit lower right now, but I still think about a 33% rate is the better rate to use for the year.

Renee Bouche

Okay. Well, I don't see any further questions. I think that's about it, John. Did you want to wrap up? Or Walt, did you want to say anything out there, Walt?

Walter Woltosz

Well, I think it's been very nice to be sitting here on the sidelines and watch the younger generation doing all of this, but I think they've done a very good job. The continued steady growth that you can see from the bar charts, especially quarter-over-quarter or year-after-year, they just seemed to be on a very steady solid trajectory, and I don't see any reason why that should change. John D. mentioned that education is a major key to expanding the market. It's something that we've thought about for many years. And our workshops are being, are serving us well to educate more and more people on the benefits of model-based simulation and modeling to use for drug development. I'm very pleased with how things are going and look forward to the next quarter call.

Renee Bouche

Thank you, Walt. We actually do have 1 final question that just came in, and the question is, can you, what is the change in the headcount in the quarter, I guess, employee?

John Kneisel

I think right now, I think we're -- I guess it depends on the exact timing what the quarter is. I think we were up six people as of right now or as of the end of the quarter, we will be, but I'm going to go back and recheck it. It's been a moving target for a little bit. I got to go relook at the number. Sorry about that. I wish I knew the exact number offhand right now.

Renee Bouche

Okay. Very good. Well, I think that concludes the call today. There is one final announcement, on May 17, we'll be presenting at the Needham Emerging Technology Conference taking place at the Westin Grand Central Hotel in New York City, and we hope to meet some of you there.

So with that, we conclude today's conference call. If you missed any part of today's presentation, the replay will be available at our website, www.simulations-plus.com. Please do check out that website if you haven't seen it lately. It's really dynamic, very exciting, has a lot of excellent information. Thank you to all of you for joining us today.

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