Simulations Plus, Inc. (SLP) Q4 2018 Earnings Report, Transcript and Summary

Shawn O’Connor - Chief Executive Officer John Kneisel - Chief Financial Officer Brett Howell - DILIsym, Division President [Call Starts Abruptly]…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 of the Company’s risk factors is contained in the Company’s quarterly and annual reports and filed with the Securities and Exchange Commission. With that said, I’d like to turn the call over to Shawn O’Connor. Shawn? Shawn O’Connor: Thank you, Cameron. As most of you know, I joined Simulations Plus as a CEO in late June of this year, succeeding its founding CEO, Walt Woltosz, who remains with the Company as its Chairman of the Board. I’d like to thank Walt for his assistance in the transition in these last few months and for handing off to me a Company as strong and sound as Simulations Plus today. Since our last conference call, I have spent significant time getting to know the Company, its products and services, its client base and employees. I spent time in each of our primary locations Lancaster, California, Buffalo, New York and at RTP in North Carolina, to meet and get to know our staff. There have been several key conferences in the past few months that have provided me with an opportunity to see our Company's presence in the marketplace and meet many of our clients. And in October, we gathered the Board of Directors and executive management team as a group to discuss and review our business now and in the future. It has been a fast paced but rewarding introduction to the world of Simulations Plus. On this call, I will briefly reintroduce myself for those that I have yet to meet or speak with. I will review some highlights of the Company’s performance in the fourth quarter and the full fiscal year 2018. And John Kneisel, our CFO, will provide a summary of the company’s financial results for more detail. As many of you know, I’ve spent the last 15 plus years leading organizations in the pharmaceutical modeling and simulation software and services space. I was most recently the CEO of Entelos, a pioneer of quantitative systems, pharmacology software and services to the pharmaceutical drug development market. Prior to Entelos, I was CEO of Pharsight Corporation, a leading provider of PKPD modeling software products and services for that same market. I’ve lived the evolution of in silica modeling in the pharmaceutical world. Well, it began as a curiosity and was viewed with great skepticism eventually found this place with early adopters in the industry. As an understanding of the benefits of predictive analytics grew and early successes were registered, the search for application of modeling and simulation methodologies grew, broadened into full. The curiosity of what is it transition to how and where can I apply it, software applications like those developed at Simulations Plus were introduced to facilitate the methodology. Industry began to invest in the approach, regulatory acceptance with gains and adoption or modeling indoors. Most importantly, the use of modeling and simulation has positively impacted the cost, timelines and output of the drug development process. Today, there is growing momentum within the industry to adopt and apply model based drug development in pharmaceutical drug development, drug safety and efficacy and personalized medicine. Yet, its adoption, breath of application and impact still lags for the most part in our future. Recent report by Infinium Global Research on the computational biology market projected the market to grow at a compounded annual growth rate of 21% over the forecasted period 2018 to 2024. The report included Simulations Plus in its portfolio of leaders in the space. With that as a backdrop, I am excited to leverage my many years of experience for the benefit of Simulations Plus shareholders. This is a wonderful opportunity to lead a strong well respected company that has played a leadership role in the story to-date of model based drug development in the pharmaceutical world. Simulations Plus's portfolio of modeling and Simulation software product is excellent. GastroPlus is a gold standard product of choice in the pharmaceutical industry. It provides a strong foundation for a suite of software products that stand the drug development continuum. The Company has a wealth of skilled scientific talent with expertise across the various modalities of modeling techniques that support our clients in the delivery of service based projects for our customers. And the organization has a proven track record of delivering new products through internal development, supplemented by collective strategic acquisitions to broaden our value to both clients and shareholders. Let me turn my attention to our fourth quarter and fiscal 2018 results. Simulations Plus delivered a record $29.6 million in revenue for fiscal year 2018, up 23% compared to the prior fiscal year. 57% of those revenues resourced in software products, which grew 13% compared to 2017. 43% of those revenues were resourced in client services, which grew 38% compared to 2017. The fourth quarter of fiscal 2018 is the first quarter that DILIsym acquired in June of 2017 is contributing in both the current and prior year comparison results. Additionally, we typically experienced seasonality in our fourth quarters due to a slowdown in purchasing department and project activities at our clients during the summer months. Our 7% revenue growth in the fourth quarter of 2018 is in-line with our historical annual revenue growth in the 10% to 15% range on an annual basis. Our gross margin and net income before taxes grew at 22% and 23% for the year. Our earnings per share grew 51.4% to $0.50 in 2018 would benefit beyond our good financial performance from the tax benefit recognized in the second quarter of 2018. The Company generated $9.3 million of cash for the year and continued to return on capital shareholders through a quarterly dividend. Our Lancaster division revenues were up 13% year-over-year, reflecting 8% growth in software and a 70% increase in consulting services. This division of the Company represented 59.2% of revenue and 71% of EBITDA for 2018. During the quarter, the division secured two additional FDA grants that fund further product enhancements that enhance the market for our software products. The division is experiencing high demand to support our clients on a project basis, leading to the continued strong growth of the service revenues in this division. Our Buffalo division revenues were up 8% year-over-year and are mostly consulting service based. The division of the company represented 26.5% of revenue and 17.9% of EBITDA for 2018. The division currently provides consulting services to 27 companies, representing 44 drugs and 77 projects in total. The division initiated 41 new projects during the year and currently has 47 project proposals outstanding with 28 companies. Our RTP division, revenues were up 244% year-over-year with a total of $4.3 million revenue for the year. The year-over-year growth rate is obviously influenced by their acquisition timing at the end of fiscal year 2017. This division of the Company represented 14.4% of revenue and 11.3% of EBITDA for 2018. During the quarter, the division secured an NIH SPIR Fast Track award for $1.7 million over two years for RENAsym, a drug induced kidney injury model that will join our product suite upon completion. The division has a robust pipeline of service proposals with client at this time. Our growth strategy is sourced in both organic initiatives, as well as external acquisition efforts. Our software business has grown at a very steady consistent pace sourced in the introduction of new products, funded by the Company, as well as through successful awards of grants. It delivers a steady stream of upgrades and enhancements to existing products that fuel growth in a market that is estimated to be only be penetrated to the June of 20%. Our service business is experiencing high demand and multitude of opportunities to grow. Our ability to support these opportunities with the expansion of our scientific talent will be critical as we move forward. The Company has successfully augmented its growth over the past few years with strategic acquisitions that broaden our capabilities and accelerate our growth. We continue to pursue selective strategic acquisition opportunities to support that growth. And underlying all of these growth sources is our need to continue to enhance our sales and marketing resources and infrastructure to capitalize on the plentiful opportunities presented by the marketplace. Let me now turn the call over to John to review the detailed financial results.

Thanks Shawn. We’ll go over the first quarter of last quarter's results first here. Consolidated net revenues for our fourth quarter of fiscal year 2018 were up 6.7% or approximately $400,000 to $6.7 million compared to $6.3 million for the prior year. By division; Lancaster revenues were up $13.4 million to $3.3 million; Buffalo revenues were up about 1% or $2.1 million; and RTP revenues were up 1% to $1.2 million. The consolidated software and software related revenues were up about $300,000 or about 11% and consulting service revenues were up about $100,000 or 3.4%. Those revenues for the fourth quarter on a year-over-year growth rate percentage were affected by two factors. First, this is the first quarter in which RTP, which was acquired in June of '17, contributed revenues in both the current and prior year results that Shawn had said earlier. Second, Buffalo and RTP divisions reported, what we consider, unseasonably higher growth in the fourth quarter of last year with typically slow fourth quarter seasonality we've had historically experienced returning here in the fourth quarter of 2018. We believe these results, excluding those two factors, is in line with our historical annual growth rate of 10% to 15% range on an annual basis. Moving to gross profit. It increased by approximately $300,000 or 6.4% from $4.3 million in the fourth quarter of fiscal '17 to $4.6 million this year. $200,000 of that increase was derived from our Lancaster division. Our gross profit margin was relatively unchanged year-over-year 68.3% for the fourth quarter of fiscal '18 compared to 68.5% a year ago. That small 20% basis point decrease was mainly the result of increased amortization of software development costs. SG&A expenses decreased to $2.2 million or 33.4% of revenue for the fourth quarter, a decrease of 8.2% compared to $2.4 million or 38.8% of revenue in the fourth quarter of fiscal year '17. That decrease was primarily a result of approximately $300,000 of fiscal year '17 acquisition related fees for the purchase of DILIsym and RTP's acquisition last year. And the difference was really partially -- mostly offset by increased labor costs in '18, as that increased about $100,000 in that time period. Research and development expenses were relatively unchanged from an expense side, but we did spend approximately $80,000 more in the period, which went into capitalization. Income from operations for the fourth quarter of fiscal '18 was $1.9 million, up 31.3% or approximately -- or 31.3%, approximately of $4.5 million compared to $1.4 million a year ago quarter. This increase was primarily the result of increased revenues combined with stable gross margin and reduction in operating expenses. Provision for income taxes, which actually doesn’t show into the slide, was about $500,000 and effective tax rate of 27.3% compared to about $250,000 in the prior year, which is an effective tax rate of 18% in the year ago. That tax rate increase is really attributable to 2017 fourth quarter tax provision adjustments, which resulted in a little bit lower than normal rate in the fourth quarter of '17. Net income increased by about $200,000 or 16.2% to $1.3 million for the most recent quarter compared to $1.2 million a year ago. On a per share basis, net income was $0.07 per diluted share in the fourth quarter compared to $0.06 in the prior year. EBITDA was $2.6 million for the fourth quarter of '18, up 27.3% compared to $2 million a year ago. Turning to next slide for full year’s results here. Consolidated net revenues increased 22.9% or $5.5 million to a record $29.7 million for fiscal year 2018 compared to $24.1 million for fiscal year ’17. By division; Lancaster was up 12.5% to $17.6 million; Buffalo was up 7.6 to 7.9 million; and RTP was up, as Shawn had said before, 244% to $4.3 million, a rate, which obviously is impacted by being their first full year of operations when last year’s quarter, their revenues were only 1.2 for the one quarter of operation. Gross profit for the full year was up 21.5% year-over-year from $17.8 million or 73.9% of revenues for fiscal year ’17 compared to 21.7 or 73.1% of revenues for fiscal year ’18. The increasing gross profit was due primarily to increased software revenues with growth in consulting services bolstered by the addition of gross profit from RTP in 2018. SG&A expenses increased by $1.4 million to $9.6 million for the full fiscal year 2018, an increase of about 16.9% compared to $8.2 million for the full fiscal year of 2017. As a percentage of revenue, SG&A decreased from 34% to 32.3%, decreased about 1.7%. The absolute dollar increase was primarily the result of $1.1 million of additional full year costs at our acquired RTP business, some increases in sales commissions on increased sales in Asian markets, additional marketing costs and increased labor related costs. In 2017, we had incurred about 620 in legal and -- consulting costs of 620,000 in legal and the consulting costs associated with the acquisition of DILIsym Services, and those costs are not duplicated in 2018. Looking at research and development expenses, we incurred approximately $3.9 million of research and development costs during 2018. Of this amount, 2.1 was capitalized and 1.8 was expensed. The increase in spend was about $1.2 million or 43.5% and total research and development expenditures between the two years. Of this approximately 500,000 were costs that were incurred by RTP. Looking at income from operations for years 2018 was $10.3 million, was up about 24.6%, approximately $2 million compared to $8.3 million a year ago. The increase was primarily the result of expansion, increasing revenues and the stable gross margins. Looking at income taxes, the provisions was $1.2 million for an effective tax rate of 11.9% this fiscal year compared to $2.5 million in effective tax rate of $29.8 million, almost 30% in previous year. Tax rate decrease was mainly attributable to the one-time deferred tax benefit adjustment of about 15% that we booked in our second quarter under the new Tax and Jobs Act, and also the decrease in tax rates that we've experienced in 2018. Net income increased this year by $3.1 million or 54.4% to $8.9 million for fiscal year '18 compared to $5.8 million for the prior year. On a per share basis, net income was $0.50 per diluted share fiscal '18 compared to $0.33 per share, in the prior year. And approximately $0.08 of this increase is attributable to that one-time deferred tax benefit credit. EBITDA was $13 million for fiscal year '18, and is up about 25% compared to $10.4 million in '17. Moving to next slide. This slide presents our revenue on a quarterly basis for the fiscal years 2015 through 2018, and it illustrates the seasonality of business with our third quarter typically being our strongest. And so there's a pattern of a drop-off in the fourth quarter, coinciding with the slowdown in our clients' purchasing and project activities during the summer months. Also shows that the fourth quarter '17 reflected unseasonably high growth sourced in our Buffalo division, as well as the first quarter including the results of our RTP division in June of '17. Discounting these factors, we believe that annual revenue for fiscal '18 is in line with our historical growth rates in the 10% to 15% range. On the next slide, we've provided a view of our income from operations by quarter for the last four fiscal years. Again, the slide illustrates the track record of increasing income from operations, both year-over-year and sequentially through the first to third quarters with the fourth quarter typically being the lightest of the year. Again on next slide we see a similar pattern of net income of third quarter, typically being the strongest and the declined between the third and fourth quarter is relatively consistent growth each quarter over the last four years. You'll note that we've shared the effect of the deferred tax benefits in the second quarter of the year as they tend to skew the presentation without calling out that difference. As expected, this is earnings -- diluted earnings per share slide, which follow the same patterns and tracks with net income. Turning to the next Slide, EBITDA follows again the same seasonality patterns as we expect in the other metrics. Slide 18 is our revenue by regions. And while the majority of our revenues are North American base, we see the Asians and Europe are actually a growing source of revenues for our Company. Look at Slide 19, this one is a quarterly view of cash and cash outflows for dividends and acquisitions, and the impact it’s had on our cash balances was over the last five fiscal years. Beginning with the second quarter of fiscal year '14 on the left, the blue bars at the bottom illustrate our consistent dividend payout. Beginning in fiscal year '18, the Board increased the quarterly dividend payment to $0.06 per share, up from $0.05 per sure in fiscal year '17. And moving up the chart, the red bars indicate cash used for acquisitions, and spent nearly $13 million over the past four to five fiscal years. Most notably on this slide has been our ability to not only return cash to our shareholders and invest through acquisitions and maintain a healthy cash balance with ample cash, and we’ve actually had no borrowed debt. Summary of our view of our balance sheet, a few metrics here, our year-over-year cash balance increased $3.2 million and solid operating cash flow of about $9.3 million. During fiscal year ’18, we utilized about $4.1 million to fund quarterly dividend payments to our shareholders, otherwise remained free about debt and continue to increase the overall book value of the Company. Now, I’ll turn the call back to you Shawn. Shawn O’Connor: Thanks John. In conclusion, Simulations Plus has had a great fiscal year 2018, modeling Simulation adoption and expansion and positive impact on the pharmaceutical drug development process is advancing. The Company continues to grow annually in double-digits at both the top and bottom-line. Demand in both the software and services side of our businesses are strong and the Company is positioning itself to capitalize on this market dynamic. I’m pleased to be on-board and look forward to future reports to you in the coming quarters on progress with regard to the Company and its future successes. With that, I'll be glad to field any questions you might have.

Thank you [Operator Instructions]. Our first question is from Howard Halpern, and his first question. Mr. Howell, what is your assessment of the Company after your first quarter on the job? And where do you anticipate the Company’s growth opportunities lie in fiscal year ’19 and fiscal year ’20?

My assessment of the Company is very positive, and leaves me excited about the opportunities that we’re seeing in our future. It’s been very good to both confirm what I knew about the Company looking out from the outside to confirm those things that perceptions that I had, and as well get to know and understand the talent that exists in the Company. The software side of the business, which was the origin of the Company, is very strong and deep in its scientific prowess and skill and its track record of delivering very consistent upgrades and updates and new features to the portfolio software product speaks for itself, and keeps its portfolio of products at the cutting edge and upgrade value to our clients. On the consulting side of the house, I don't know that I know too many organizations that have the breadth of skill across all the modalities of modeling technique that exist out there and the talent is rich and supported a growth rate that is outpacing the software side of the business. And that speaks to the dynamic in the marketplace today, in which clients of the industry is adopting rapidly and wanting to adopt more rapidly than it can fuel with its own internal resources. And therefore, we see our clients reaching out more and more outside their walls to organizations, such Simulations Plus to perform projects on their behalf to implement model based techniques in the drug development process. So when I look out in terms of whether this growth going to come out in '19 and in '20, the years ahead of us, I see growth coming from both sides of the business, the software side, both in terms of its continued growth of its existing products. As I indicated in my presentation, we really estimate that we're only about 20% penetrated with our existing software products. We will look and identify internally investments to make in new products and as well the opportunity to acquire and add to the portfolio on the software side will be a option available to us. That growth in the software business can come from both deeper penetration and where we are at today informatics, deeper penetration in terms of more features, functionalities and software tools and in that space, as well as an expansion of the software portfolio to more broadly cover both the discovery and clinical and the whole continuum of the drug development process. On the consulting side we have, as I mentioned, skills across the spectrum of modalities, modeling techniques, our ability there to grow and meet the demand is really going to be gauged by our ability to attract more and more talent into that side of our business. The demand is high and so the challenge will be to present ourselves in the marketplace in a coordinated fashion, and be able to staff up that side of our business in order to support a very accelerated growth rate on that side of our business. And so hopefully that addresses your question.

And just as a follow-up to that question, over the next few years. Do you anticipate a revenue mix shift towards consulting services versus software? And can it get to a 50-50 mix?

Well, obviously the service side of the businesses is growing faster than the software side right now. So the momentum is in that direction. Ultimately, having a balanced mix between the two and enjoying the benefits of a profitable software model compared to the service side of the business keeps us focused on keeping that mix level, so that our profitability is not affected. So between the mix of internal or organic growth and acquisitions, we will try to keep the software or margins for the company overall as they are now but certainly the demand right now on the service side is driving that side of our business faster.

And the next question is on PKPlus. What does the sales pipeline look for PKPlus and when might a ramp in orders occur? Shawn O’Connor: Well, we've seen some uptick in terms of the activity there in the fourth quarter, but it still does remain a small portion of our business. It’s a product that’s introduced into a space in terms of the clients use of that product heavily process defined space. The pharmaceutical companies install software products and build standard operating procedures, SOPs around the products that they use. And to displace an existing product with the new product tends to be a long sales cycle process, because there’s a domino effect in terms of the work effort in our clients in that regard. PKPlus’s application elsewhere in outside of SOP environment and we're certainly focused in there to sell-through. We’re seeing that effect and yet it's still a small piece of our business at this point in time.

The next question, is everything to report on progress being made on your AI projects, or AEROModeler and MRIModeler, or any additional opportunities for new products? Shawn O’Connor: So my comments in that space would be that we put our best man on the job. Walt has taken on a role in terms of exploring areas in which we might be able to apply our existing IP and knowhow. We have successfully accomplished in the data mining space and the machine learning space, I should say, in AI space, some success in our existing products and the opportunity to leverage that into new areas, AEROModeler and in the MRI were projects of the past that we’re looking as to how we could leverage those, or other applications of our technology. And nothing to report at this stage but the success we’ve had in the past in that area certainly should support an opportunity for us to be successful and extend that into the future.

The next question is what type of traction are Simulation software products seeing in non- pharmaceutical customers and what is the growth potential? Shawn O’Connor: We had some success we believe we’ve always had, as I understand it historically in that regard. And last year, our software sales outside of pharmaceutical biotech generics space, our revenues grew their 20% year-over-year. But again, that is a small portion that only represents 5% to 6% of our total software where revenues. The opportunity exists but our organization is disproportionately very focused on our pharma clients and most of growth I would believe will come from that space.

Thank you. The next question, can you offer anticipated tax rate range for fiscal year '19? Shawn O’Connor: I'm going to hand that one off to John.

I think we're looking somewhere in the low to -- close to mid 20% range, our tax credits -- our income has grown, have less and less of an effect. So expecting somewhere around the 24%, 25% rate this next year, depending on where some of those credits and some of those numbers land.

Thank you, John. Next question, is there a covered cash balance?

Well, we certainly have forecasts and plans as we look out into the future and in the output likely cash that would be generated from that outlook. We don't specifically identify cash as being a primary target for the business.

Thank you. The next question, how's the hiring and retaining of scientists progressing?

It's an area of focus for us right now. The Company has a tremendous retention record with the population of scientific talents over the organization has a longevity to it that speaks well to the Company. And we've had success during the 2018 timeframe in terms of growing that talent inside the organization. As I indicated before, our ability to support the growth for demand that we're seeing on the services side will require us to be that much more successful as we move into the coming years. So it's a highlighted focus area for us at this point in time.

Thank you. And at this point, we have no additional questions. Shawn, I'll turn it back over to you for closing comments. Shawn O’Connor: I appreciate everyone's interest in joining the call today. I've enjoyed my first months with the organization, and look forward to speaking with you in the coming months and reporting successes of the Company as we move forward. Thank you. Thank you all very much.