Simulations Plus, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended February 29, 2024; comparison periods ended February 28, 2023. Amounts below are in U.S. dollars.
Business context
Simulations Plus provides biosimulation software and consulting services used in drug discovery, development, research, and regulatory submissions. It reports two segments: Software and Services. The company reorganized its internal structure at the start of FY2024 around product and service business units, including Cheminformatics, PBPK, QSP, CPP, and Regulatory Strategies.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $18.3M (+16%) | $15.8M | $32.8M (+18%) | $27.7M |
| Gross profit | $13.2M (+1%) | $13.1M | $23.1M (+3%) | $22.4M |
| Gross margin | 72% | 83% | 70% | 81% |
| Operating income | $4.4M (+10%) | $4.0M | $5.4M (+10%) | $4.9M |
| Net income | $4.0M (-3%) | $4.2M | $6.0M (+10%) | $5.4M |
| Diluted EPS | $0.20 | $0.20 | $0.29 | $0.26 |
| Operating cash flow | Not separately stated | Not separately stated | $6.0M | $10.2M |
Q2 software revenue rose 11% to $11.6M, while Services revenue increased 27% to $6.7M. For the first half, software grew 16% to $19.2M and Services grew 22% to $13.6M. Growth included higher Monolix, GastroPlus, ADMET Predictor, and QSP-related revenue, as well as Immunetrics contribution.
Software remained the higher-margin segment: Q2 gross margin was 88% versus 44% for Services, compared with 92% and 66% a year earlier. First-half segment margins were 88% for Software and 46% for Services, versus 90% and 68%. Management attributed Services margin pressure to the reorganization, expanded scientific headcount, compensation increases, and Immunetrics. The reorganization also shifted personnel costs from G&A into cost of revenue, so expense-category comparisons are affected by classification changes.
Q2 operating expenses were $8.8M, down 3%; G&A declined 9% to $5.5M, partly reflecting the cost reclassification, while sales and marketing rose 13% to $1.9M. First-half operating expenses were $17.7M, up 1%. Other income was $0.8M in Q2 and $2.3M for the first half, including interest income of $1.3M and $2.6M, respectively. The first-half effective tax rate was 22%, versus 19% a year earlier.
Balance sheet, cash flow, and liquidity
- At February 29, 2024, cash and cash equivalents were $37.0M; short-term investments were $71.5M and long-term investments were $9.0M. Management reported working capital of $113.4M.
- Total assets were $194.0M and total liabilities were $16.9M. The filing reports no borrowings or funded debt; liabilities include $6.9M of contracts payable, $1.0M of operating lease liabilities, and other current liabilities.
- First-half operating cash flow was $6.0M, down from $10.2M. The company cited a $2.9M unfavorable year-over-year accounts-receivable impact, including strong collections in the prior-year period.
- Investing activities used $24.4M, mainly reflecting investment purchases net of maturities, plus software development and other asset spending. Financing activities used $2.1M, primarily for $2.4M of dividends; no shares were repurchased in the period.
- Accounts receivable increased to $13.1M from $10.2M at fiscal year-end. The largest customer represented 19% of receivables; $1.8M of its $2.4M balance had been collected by March 22, 2024.
Outlook, risks, and unusual items
- The filing gives no specific revenue, earnings, or margin guidance. Management said existing capital and expected operating cash flows should be sufficient for foreseeable working-capital and capital needs. It may pursue acquisitions, investments, partnerships, or up to $30M of remaining authorized repurchases.
- Management expects demand for modeling and simulation tools to benefit from pharmaceutical R&D productivity needs, but cautions that customer delays, program holds or cancellations, industry consolidation, and economic uncertainty could hurt results. Product acceptance and growth in new markets are uncertain.
- Immunetrics earnout fair value was $5.1M at February 29, 2024, up from $4.8M at August 31, 2023. A $2.5M first-period earnout payment was made in March 2024; partial attainment may allow the second-period payment target to increase from $4.0M to $5.5M. The filing describes the earnout valuation as dependent on significant unobservable assumptions.
- Remaining performance obligations were $10.8M, with 94% expected to be recognized within 12 months; amounts may change with contract scope changes or terminations. Government grants contributed $0.7M to first-half Services revenue and are subject to grant conditions.
- No material litigation or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess whether revenue growth can continue while Services utilization and margins recover, and separate underlying cost trends from the personnel reclassification.
- Track receivable collections, operating cash conversion, and the effect of investment maturities and purchases on reported cash balances.
- Verify future Immunetrics earnout amounts, timing, and fair-value assumptions, including the potential second-period catch-up.
- Review the sustainability of interest income, the effective tax rate, and quarterly dividends alongside acquisition and repurchase plans.
- Monitor customer program delays or cancellations, grant conditions, and the timing of the $10.8M remaining performance obligations.