Simulations Plus ( Nasdaq - SLP ) - First Quarter Results on Target

Simulations Plus (SLP $2.85) reported excellent on target Q1 (November) results.  Sales advanced 15% to $2.81 million despite a reduced contribution from nonrecurring project income.  Pharmaceutical software sales climbed 18% and represented 73% of the total.  The non core synthetic speech line generated the balance and posted an 8% year to year improvement.  Non-GAAP earnings improved 33% to $.04 a share.  Virtually all of the company's income was provided by the drug development simulation business.  That segment remains unusually profitable because the technology is sold on a subscription basis, instead of as perpetual licenses.  So revenue is reoccurring.  Profitability tends to expand as unit volume grows.  A price hike implemented last spring is providing additional impetus.

Sequential improvement is likely in upcoming quarters.  The renewal rate remains close to 100%.  Most cancellations occur due to mergers or when scientists change jobs.  Those scientists tend to place new orders once they resurface.  Recent product upgrades have led some corporate buyers to purchase more copies of the software, moreover.  Additional features also have created new sales opportunities.  Simulations Plus encounters direct competition on a niche by niche basis across its entire product line, but the company generally leads in all segments and remains the only broad based supplier.  The Words Plus text to speech line has benefited from product upgrades, as well.  Our estimates assume a neutral contribution from that segment although a modest degree of profitability recently was achieved.

We continue to estimate fiscal 2011 (August) non-GAAP income will rise 29% to $.18 a share.  Share repurchases have enhanced comparisons over the past several quarters, and that program may be continued.  Sales could rise 21% to $13.0 million.  Faster growth could be realized if Simulations Plus leveraged its established distribution system with additional software products and services.  The company has eyed a number of prospective acquisitions in the past but hasn't pulled the trigger due to pricing and other concerns.  The decision to retain the Words Plus operation (which earns little or nothing), and the buyback program (which yields a 5%-7% return on investment,depending on whether trailing or estimated EPS is used in the calculation), suggests that caution will remain the order of the day.  Still, worthwhile appreciation is possible even in the absence of a more dynamic corporate development strategy.

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