Release Date: July 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Simulations Plus Inc (SLP, Financial) reported a solid revenue growth of 14% for the third quarter of fiscal 2024.
- The company's software segment saw a 12% increase in revenue for the quarter and 14% for the nine-month period.
- The Cheminformatics business unit delivered 15% revenue growth in the third quarter and 12% for the fiscal year to date.
- The acquisition of Pro-ficiency is progressing well and is expected to contribute positively to fiscal 2025 earnings.
- Simulations Plus Inc (SLP) has a strong balance sheet with $119 million in cash and investments and no debt.
Negative Points
- Total gross margin for Q3 decreased to 71% from 82% last year, with software gross margin at 88% versus 91%, and services gross margin at 41% versus 63%.
- Income from operations was 10% of revenue compared to 25% last year, indicating a significant decline.
- Net income for the third quarter was $3.1 million, or 17% of revenue, compared to $4 million, or 25% of revenue last year.
- Adjusted EBITDA for the third quarter was $5.7 million compared to $6.5 million last year, reflecting a decrease in profitability.
- Services revenue in the PBPK business unit decreased 10% for the third quarter due to client source data delays impacting the initiation of contracted projects.
Q & A Highlights
Q: How should we think about 2025 organic revenue growth potential given the current improving macro environment and bookings and backlog visibility? Also, are you still expecting a $15 million to $18 million contribution from Pro-ficiency in 2025?
A: We will provide guidance in October for fiscal year '25. The biosimulation market is growing at 12% to 15%, and we have given guidance of 10% to 15% in a difficult market. The potential exists for market improvement to contribute to an advancement in fiscal year '25. However, we have not yet seen this translate into bookings and activity. The funding in biotech has improved, but large pharma spending remains mixed. We still expect a $15 million to $18 million contribution from Pro-ficiency in fiscal '25.
Q: On margins, why did adjusted EBITDA margin come in below expectations despite outperformance in software revenue?
A: The adjusted EBITDA margin has been around 31% to 32% recently, and we target 35% to 40%. Temporary factors include costs associated with a significant software release and higher hiring rates due to low employee churn. These factors will even out over the coming quarters. Pro-ficiency will add some pressure initially but is expected to fit our long-term profile.
Q: On the PBPK services side, with delays due to client source data, is this work delayed or canceled? Should we expect a benefit from this work materializing in Q4 or 2025?
A: The delays are not cancellations. Whether the delay catches up in Q4 is uncertain, but we hope to get back on track with a more consistent flow. Our consulting services portfolio usually evens out, and overall growth remains strong.
Q: In terms of the market as a whole, has your cautious optimism changed given recent market conditions?
A: The biotech funding environment has leveled out, and we are waiting for it to translate into contracted business. Large pharma spending remains mixed, with budgetary decisions impacting purchasing activity. We remain in the same cautious framework as in the last quarter or two.
Q: Regarding Pro-ficiency, will updates on the next call be related to guidance? What else should we expect?
A: In October, we will comment on the integration and operating success of Pro-ficiency during the fourth quarter. We will provide more detail on its contribution in fiscal year '25. The adjusted EPS guidance reflects the mix between the impacts of lost interest income and transaction costs.
Q: How will Pro-ficiency's margins improve over time?
A: Pro-ficiency's margins are impacted by the mix between software and service revenues and operating efficiencies. Their software margin is around 80%, and we see a path to 90% through technology improvements. The growth rate of their revenue will also help improve overall margins gradually, with potential stair-step improvements in fiscal year '25.
Q: What is the base for the accretive guidance for Pro-ficiency in fiscal '25?
A: Pro-ficiency will be accretive in terms of covering the lost interest income from the cash used for the acquisition. It will contribute positively to earnings per share.
Q: Can you clarify the EPS guidance changes?
A: The transaction costs were higher than initially expected, impacting the GAAP EPS guidance. The adjusted EPS guidance of $0.54 to $0.56 excludes these one-time costs.
Q: What drove the higher G&A costs sequentially?
A: The primary driver is the hiring of employees, including the Immunetrics team. Transaction costs also contributed to the increase in G&A expenses.
Q: What is the long-term adjusted EBITDA margin expectation?
A: Our target remains 35% to 40%. We have been below 35% recently due to compensation increases and other factors, but we aim to gradually move back up to our target range.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
