Simulations Plus ( Nasdaq - SLP ) -- New Product Momentum

Simulations Plus (SLP $4.50) reported good on target Q3 (May) results.  Sales improved 12% to $3.09 million.  Earnings rose 17% to $.07 a share.  Demand for consulting services increased most briskly, benefiting from the company's in-house malaria project.  Last year Simulations Plus conjured up seven molecules to treat malaria using its software, without any laboratory testing at all.  All of the drug candidates generated by the software showed activity in subsequent testing.  That demonstration caught the attention of several pharmaceutical makers who are trying to cut R&D costs and improve their pipeline.  More hired Simulations Plus to help implement the process.

Margins on product sales remained elevated.  Simulations Plus sells its software on an annual basis.  The renewal rate typically is 95% or higher.  That measure dipped in the first (November) quarter due to a series of customer mergers.  Some licenses don't renew when individual scientists who use the software move to new positions or retire.  Absent corporate reorganization factors, virtually every license renews each year, creating a rising recurring revenue stream as new customers are added.

Product upgrades and expansions promise to accelerate growth.  A collaboration with Bayer recently was completed, creating a sizable new database to sell.  The key GastroPlus line recently was upgraded, as well.  Pricing changes could implemented soon, too, enabling the company to penetrate niche markets more easily.  A general hike also is possible.

We estimate income will advance 15% next year to $.23 a share.  That assumes a rising level of selling expense and R&D outlays.  Faster gains are possible if revenue gains outpace the cost increases.

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