Simulations Plus ( Nasdaq SLP ) - Follow-up Report

Simulations Plus (SLP $2.95) reported Q4 (August) results that were consistent with its pre-announcement.  Earnings were flat year to year at $.02 a share.  (See "Accounting Notes.")  Sales improved 20% to $2.2 million.  The high potential pharmaceutical modeling software line generated most of the advance, although the Words Plus segment performed better with the aid of a new product launch.  For the entire fiscal year earnings rose 40% to $.14 a share on a 17% expansion in sales ($10.7 million).  Pretax margins finished at 30.3% despite a breakeven showing by the Words Plus division, which represented 29% of total sales.  Software profitability is especially noteworthy because Simulations Plus only issues one year licenses, which have to be renewed.  Most software companies with above average margins rely on one time perpetual sales to juice up near term results.  Future sales are more predictable with Simulations Plus' strategy.

Margins are likely to expand in fiscal 2011 (August).  Pharmaceutical software sales are poised to keep growing at a 25% rate, and comprise a rising proportion of total sales.  Operating costs probably will widen at a lesser rate.  And the Words Plus unit itself may start to kick in some profits, following a lengthy dry spell.  We estimate income will jump 29%-43% to $.18-$.20 a share on a 21%-26% increase in sales ($13.0-$13.5 million).  Acquisition of a complementary software line could yield additional leverage.  Cash increased $2.16 million last year to $9.63 million, even after stock buybacks equal to $1.03 million.  So the money is available if the opportunity arises.

The long term outlook remains bright.  Only a small portion of the potential market has been penetrated to date.  Software modeling of new drug candidates remains in an early stage of development.  Pharmaceutical manufacturers are gravitating to the technology as a way to prune their R&D pipelines more efficiently so they can shift resources behind drugs with the greatest chance for success.  The software delivers day to day cost savings, as well.  As medical science moves forward software modeling is likely to continue achieving greater adoption.  Growth of 20%-30% appears sustainable well into the decade. 

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