Simulations Plus Sees Uneven Income Streams

Simulations Plus Inc. showed an increase in revenue from its software sales in the fiscal third quarter while its services business saw a decrease. 

Shawn O’Connor, chief executive of the Lancaster provider of modeling and simulation software and services for the pharmaceutical, chemical, food and cosmetics industries, called the drop in services revenue a short-term phenomenon in a conference call with analysts to discuss the quarterly earnings. 

Services revenue declined 18 percent to $4.5 million for the quarter. By comparison, software revenue increased 21 percent to $8.3 million.

“This decline was due to an unusually high number of projects, nine in total, impacted by delays, holds or drug development program cancellations, all of which occurred during the latter part of the quarter,” O’Connor said on the call. 

On July 12, the company reported net income of $3.8 million (18 cents a share) for the quarter ending May 31, compared with net income of $2.9 million (16 cents) in the same period a year earlier. Revenue increased by 4 percent to $12.8 million. 

The company’s share price hit a 52-week high in early February when it reached $89.33. Since then, it has dropped by 52 percent as of Sept. 14 when the price closed at $42.87. Simulations Plus’s shares closed at $40.08 on Sept. 22.

Analysts who follow the company noted the services revenue drop off. 

Matt Hewitt, senior research analyst with Craig-Hallum Capital Group in Minneapolis, said in a research note that he was confident that the issues leading to the services revenue drop were short-term and emphasized the company’s work backlog growing to $12.4 million from $11.2 million in the second quarter. 

“While it is difficult to predict the precise timing of when results will bounce back, we would encourage long-term investors to begin digging in on the story, so that they can be prepared to start a position when visibility improves,” Hewitt said in the report. 

Francois Brisebois, an analyst with Oppenheimer & Co Inc. believed that while the services revenue miss was far from ideal, he didn’t expect the disruptions to linger much past the company’s fiscal fourth quarter, which ended in August.  

“Although (Simulation Plus management) anticipates the delays to impact its FY4Q21 services revenue as well, the company remains optimistic in its services’ long-term potential as pharma customers continue to utilize modeling and simulation,” Brisebois stated in his research note from July. 

Fourth-quarter decline

In his comments during the conference call, O’Connor noted that service revenues typically were non-recurring and therefore could show volatility.

“The service volatility encountered this quarter is not reflective of any market disruption or business executions that change our long-term outlook for modeling and simulations adoption or our growth prospects as a company,” O’Connor said.

While the company was not yet releasing its guidance for the fiscal 2022 year, he believed that Simulations Plus would grow over the longer term by more than 15 percent annually, O’Connor added. 

For the services revenue, the expectation was to see a decline for the full fiscal year of 7 percent to 12 percent, while software was forecast to grow 20 percent to 25 percent, he continued. 

“The timing of the delays, holds and drug development program cancellations means that the fourth fiscal quarter is likely to see lower service revenues,” O’Connor said during the call. “And we don’t yet have the necessary visibility to predict when these projects will move forward. Again, we view this situation as temporary and strictly related to the timing of customer projects.”

During the quarter, the company marked its 25th anniversary in business.

Simulations Plus was founded in 1996 by Walter Woltosz and it became a public company three years later when it was listed on the Nasdaq. 

“We stand 25 years later as a leader in this field that has now achieved industry, scientific and regulatory acceptance and endorsement,” O’Connor said in a statement released by the company about the anniversary. “Today, these approaches are being rapidly adopted to significantly improve the time and cost to regulatory approval for the pharmaceutical and biotech communities.”

To mark the anniversary, Simulations Plus plans to donate $25,000 to each of four charities throughout the year. Recipients include American Forests, a conservation group based in Washington, D.C. and Feeding America, a Chicago charity that provides food to the needy. The company also plans to provide new website content, including a redesigned resources page, team bio pages and scientific case studies; and by hosting the second annual Model-Informed Drug Development conference in February.