Simulations Plus ( Nasdaq - SLP ) -- Follow-up Report

Simulations Plus (SLP $3.15) reported Q2 (February) results that were somewhat above our expectation.  Revenues improved 14% to $3.35 million, consistent with the company's earlier announcement.  Pretax margins widened dramatically to 42.7% (excluding non cash stock option expense), propelling income to $.06 a share (+50%).  The stock option adjustment was modest, boosting margins by 1.1%.  Most of the margin expansion derived from reduced selling and overhead costs. A majority of the sales growth in the pharmaceutical modeling software line was provided by existing customers.  Renewals accounted for 63% of sales.  New license sales to existing customers added another 9%.  The renewal rate was 96%.  New business (28%) continued to reinforce Simulations Plus's growth trajectory, though, fueled by an active trade show and in-house marketing program.  The earthquakes in Japan didn't impact financial performance.

Substantial leverage remains possible if the company can acquire complementary products and feed them into its existing customer base.  Simulations Plus is exploring acquisitions, although at this stage the best fits appear to be larger organizations that might view the company itself as an appealing target.  Simulations Plus also plans to begin doing some original research, using its own tools to identify promising drug candidates.  That project isn't likely to yield actual products necessarily, but it should provide case studies that existing and prospective customers can refer to.  The non core text to speech line remains in a sideways pattern and isn't contributing materially to profitability.  Overall margins promise to keep rising as the pharmaceutical software segment continues to expand its share of total revenue.  Comparisons will be impacted a little by the absence of U.S. Government grants that pumped up prior year results.  For now we are maintaining our full year (August) estimates.  A somewhat stronger performance is possible.

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