Simulations Plus, Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended November 30, 2022; comparisons are with the three months ended November 30, 2021. Simulations Plus develops drug discovery and development modeling software and provides pharmaceutical consulting services. Figures below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $11.964 million | $12.417 million | Down 4% |
| Gross profit / margin | $9.293 million / 78% | $9.661 million / 78% | Gross profit down 4% |
| Operating expenses | $8.415 million | $5.870 million | Up 43% |
| Operating income | $0.878 million | $3.791 million | Down 77% |
| Other income, net | $0.740 million | $0.065 million | Mainly higher interest income |
| Net income | $1.245 million | $3.026 million | Down 59% |
| Diluted EPS | $0.06 | $0.15 | Down $0.09 |
| Operating cash flow | $4.707 million | $3.582 million | Up $1.125 million |
Revenue, margins, liquidity and balance sheet
- Software revenue declined 17% to $6.074 million, attributed primarily to license-renewal timing and foreign-exchange fluctuations. Services revenue rose 17% to $5.890 million.
- Software gross margin was 85%, versus 90% a year earlier; services gross margin improved to 70%, from 60%. Overall gross margin remained 78%.
- Cash and cash equivalents were $49.392 million and short-term investments were $82.139 million at November 30. Working capital was $140.7 million; the current ratio was 18.5.
- Short-term investments were classified as held-to-maturity. The filing reports $0.890 million of gross unrealized losses, which management attributed primarily to rising interest rates; no credit-loss allowance was recorded.
- No borrowings are listed on the balance sheet. Operating lease liabilities totaled $1.292 million. The company reported a debt-to-equity ratio of 0.1.
- Investing cash flow was a $6.422 million outflow, largely reflecting purchases and maturities of short-term investments and $0.894 million of capitalized software development. Financing cash flow was a $0.460 million outflow, including $1.218 million of dividends.
Material changes and management commentary
- SG&A increased 45% to $7.249 million, including higher personnel costs ($1.2 million increase), merger and acquisition costs, distributor commissions and travel. R&D expense increased 32% to $1.166 million; an additional $0.9 million of R&D costs was capitalized.
- Higher interest income—$0.771 million versus $0.064 million—supported pretax results, but did not offset the operating-income decline.
- Management said existing capital and expected operating cash flows should meet anticipated working-capital and capital-expenditure needs for the foreseeable future, including the repurchase authorization if pursued. No quantified revenue or earnings guidance is provided.
- Remaining performance obligations were $12.7 million; 97% were expected to be recognized over the next 12 months, subject to changes including contract terminations or scope changes.
Outlook, risks and notable items
- Management cited potential adverse effects from customer delays, program holds or cancellations, and pharmaceutical-industry consolidation or downsizing. The company also identifies rapid competition and the need for successful product development and adoption as business risks.
- International customers generated 29% of revenue. The three largest customers contributed 8%, 3% and 3%, respectively, of quarterly revenue.
- On December 29, 2022, the board authorized repurchases of up to $50 million of common stock, including an accelerated repurchase of up to $20 million. Repurchases are discretionary, may be suspended or discontinued, and are not guaranteed. The filing warns that repurchases may increase share-price volatility and may not enhance shareholder value.
- On January 4, 2023, the board declared a $0.06-per-share dividend, payable February 6, 2023, to holders of record January 30.
- The company reported no pending or threatened legal proceedings and no material change in internal control over financial reporting. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether software-license renewals recover after the reported timing-related decline, and how foreign-exchange movements affect software sales.
- Whether services growth and margin improvement continue, and whether higher SG&A and stock-based compensation remain elevated.
- The composition, maturity profile and realized performance of held-to-maturity investments, including the reported unrealized losses.
- Whether the company executes any portion of the $50 million repurchase authorization or $20 million accelerated repurchase, and the effect on cash, share count and shareholder returns.
- Progress against remaining performance obligations and any customer delays, cancellations or changes in project scope.