Business context and reporting period
Simulations Plus, Inc. develops pharmaceutical simulation and machine-learning software and provides consulting and analytical services. This unaudited Form 10-Q covers the quarter and six months ended February 28, 2018 (fiscal Q2 and first half of FY2018). Results include DILIsym, acquired June 1, 2017, so year-over-year comparisons include its contribution in 2018 but not 2017.
Financial highlights
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 |
|---|---|---|
| Revenue | $7.36 million | $14.43 million |
| Gross profit / margin | $5.24 million / 71.2% | $10.57 million / 73.3% |
| Operating income / margin | $2.42 million / 32.9% | $4.98 million / 34.5% |
| Net income | $3.47 million | $5.19 million |
| Diluted EPS | $0.19 | $0.29 |
Revenue increased 28.9% in Q2 and 29.7% year to date versus the prior-year periods. In Q2, software and related sales rose 10.6%, while consulting and analytical study revenue rose 66.2%. First-half increases were 10.0% and 66.3%, respectively. DILIsym contributed $939,000 of Q2 revenue and $2.05 million for the first half.
Cash and cash equivalents were $6.92 million at February 28, 2018, versus $6.22 million at August 31, 2017. Current assets were $15.33 million and current liabilities $5.52 million. Total liabilities were $11.63 million and shareholders’ equity $29.43 million. Acquisition-related contracts payable totaled $5.81 million, including $2.91 million current and $2.90 million long-term; the filing does not report conventional bank debt.
First-half operating cash flow was $4.07 million, compared with $1.72 million a year earlier. Investing activities used $1.21 million, including $1.15 million of capitalized software development costs. Financing activities used $2.15 million, including $2.08 million of dividends. Cash increased $705,000 during the six months.
Material changes versus prior comparable periods
- Q2 revenue increased $1.65 million; operating income rose 34.7%. First-half operating income increased 33.8% to $4.98 million.
- Gross margin declined to 71.2% in Q2 from 72.8%, and to 73.3% for the first half from 74.0%, mainly reflecting higher direct contract-study costs and DILIsym-related costs.
- Q2 net income increased $2.28 million, but the increase included a one-time $1.5 million tax benefit from remeasuring deferred taxes following the Tax Cuts and Jobs Act. Excluding that benefit, management said Q2 net income rose 44.2%; first-half net income rose 44.1% excluding the benefit.
- Operating expenses increased in absolute dollars, including higher payroll, insurance, R&D, and acquisition-related amortization. As a share of revenue, SG&A declined year over year in both comparison periods.
Outlook, commentary, and risks
Management stated that cash and anticipated operating funds should meet working-capital and capital-expenditure needs for the foreseeable future. It said it expects future quarterly dividends to be $0.06 per share, subject to Board approval and change. A $0.06 dividend was declared after quarter-end, payable May 2, 2018. No specific revenue or earnings guidance was provided.
Management expected GastroPlus version 9.6 to be released in Spring 2018 and described ongoing product development, consulting demand, and possible expansion of machine-learning applications into other industries. These are forward-looking plans, not assurances of results.
Risks include competition and rapid change in software markets, reliance on pharmaceutical-industry customers, customer and receivables concentration, foreign-exchange exposure (the company does not hedge), and acquisition earn-out valuation and payment obligations. International sales were 41% of first-half revenue, versus 36% a year earlier. Cash exceeding FDIC-insured limits was $5.96 million. The company reported no pending legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects DILIsym’s inclusion rather than organic growth, and how acquired operations perform over subsequent periods.
- The sustainability of consulting growth and software sales, and the effect of increased contract costs on gross margins.
- The reported $1.5 million nonrecurring tax benefit and the underlying tax rate and earnings trend excluding it.
- Timing and amount of DILIsym holdback and earn-out payments, including the fair-value estimate of contingent consideration.
- Cash collection, customer concentration, uninsured bank balances, and the company’s ability to maintain dividends while funding product development.