Simulations Plus, Inc. quarterly report, Q2 FY2023

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Simulations Plus, Inc. — Q2 FY2023 Form 10-Q

Business context and reporting period. The filing covers the quarter and six months ended February 28, 2023. Simulations Plus develops drug discovery and development software and provides pharmaceutical development consulting. Results are unaudited.

Financial results and liquidity

  • Quarter revenue: $15.75 million, up 6% year over year. Software revenue rose 7% to $10.49 million; services rose 4% to $5.26 million.
  • Quarter profitability: Gross profit was $13.13 million, up 10%, with gross margin of 83% versus 81%. Operating income fell 26% to $4.03 million; net income fell 5% to $4.17 million. Diluted EPS was $0.20 versus $0.21.
  • Six-month revenue: $27.71 million, up 2%. Services increased 11% to $11.15 million, while software declined 3% to $16.56 million.
  • Six-month profitability: Gross profit increased 4% to $22.42 million and gross margin rose to 81% from 79%. Operating income declined 47% to $4.91 million; net income declined 27% to $5.42 million. Diluted EPS was $0.26 versus $0.36.
  • Costs and margins: Six-month R&D expense increased 39% to $2.48 million and SG&A increased 42% to $15.03 million. Operating margin was approximately 18% versus 34%; net margin was approximately 20% versus 27%.
  • Cash flow: Six-month operating cash flow was $10.25 million, compared with $6.18 million a year earlier. Investing activities used $1.07 million; financing activities used $21.45 million, including the $20 million share repurchase and $2.41 million in dividends. Cash and cash equivalents decreased by $12.28 million.
  • Liquidity and debt: At February 28, cash and cash equivalents were $39.29 million and short-term investments were $76.05 million; working capital was $125.5 million and the current ratio was 21.9. No interest-bearing borrowings are listed on the balance sheet; operating lease liabilities totaled $1.18 million. The filing reports a debt-to-equity ratio of 0.1.

Material changes versus prior year

  • Quarter revenue growth and higher gross profit did not offset sharply higher operating expenses, particularly employee-related costs, leading to lower operating and net income.
  • For the six months, services growth and improved services gross profit more than offset lower software revenue and software gross profit. Software license renewals timing and foreign-exchange movements contributed to the software revenue decline.
  • Higher interest income materially lifted other income: $1.76 million for the six months versus $0.14 million, primarily reflecting higher interest rates.
  • Operating cash flow improved year over year, including a favorable reduction in accounts receivable, while financing cash use increased because of the repurchase.

Outlook, management commentary, and risks

  • No numeric revenue or earnings guidance is provided. Management says existing capital and anticipated operating cash flows should cover foreseeable working-capital and capital needs, including completion of the repurchase program if pursued.
  • Management attributes higher personnel costs to 14% headcount growth and compensation adjustments following an external market study. R&D spending also supported MonolixSuite 2023R1, released February 28, 2023.
  • The company has $10.4 million of remaining performance obligations; 96% is expected to be recognized within 12 months, subject to contract changes or termination.
  • The company authorized a $50 million repurchase program and paid $20 million under an accelerated share repurchase agreement (ASR), receiving 408,685 shares initially. Final settlement was expected in Q3 FY2023; management estimated an additional delivery of approximately 91,000 shares, subject to adjustment. A further $30 million was available under the program after the ASR.
  • Risks cited include customer delays, program cancellations or consolidation; competition and product-development execution; economic uncertainty, inflation and recession risk; and potential disruption to access to cash or financing from financial-sector instability. The company reported no deposits with Silicon Valley Bank, Signature Bank, or other regional banks.
  • The Lancaster headquarters lease amendment, effective May 1, 2023, reduces leased space and monthly base rent and extends the lease through April 2028, with an option to opt out of some or all of the final three years.
  • No pending or threatened legal proceedings were reported. Management concluded disclosure controls and procedures were effective.

Important facts for investors to verify

  • Whether operating-expense growth moderates and revenue growth translates into improved operating income and earnings.
  • Software renewal timing, foreign-exchange effects, and the durability of services growth and segment margins.
  • Final ASR settlement, including actual shares delivered or any cash or share payment required, and future use of the remaining repurchase authorization.
  • Conversion of remaining performance obligations into revenue and any changes in customer demand, cancellations, or project timing.
  • Cash and investment balances, investment values and maturities, and the company’s ability to sustain dividends while funding operations, development, and potential acquisitions.