Simulations Plus ( Nasdaq - SLP ) -- Outlook Remains Positive

Simulations Plus (SLP $2.75) is on target to report excellent on target Q3 (May) results.  The company said sales were up 10% in the period to $3.44 million.  Pharmaceutical software revenues generated all of the improvement, advancing 14%.  That represented 77% of the total.  The non core Words Plus subsidiary posted flat revenues (23% of the total).  Sales of software licenses expanded at a faster pace.  In the year ago period Simulations Plus was engaged in some collaborative research projects which weren't repeated.  That dampened the overall revenue comparison.  Earnings will be released in July.  A strong showing is likely, fueled by ongoing improvement in profit margins.  Simulations Plus has been adding scientific and marketing personnel but those costs have been overtaken by the climb in recurring software revenues.  Profitability is likely to remain well above average in upcoming periods, although some moderation is possible in the August period because fewer contracts come up for renewal.  Our full year (August) Non-GAAP earnings estimate is unchanged at $.18 a share.

Growth could accelerate in fiscal 2012 (August).  The slow growing Words Plus segment will represent a shrinking portion of the overall business.  And comparisons won't be skewed by non recurring collaboration revenue.  License income will be the central factor.  Economic conditions haven't impacted demand to date.  In fact, several pharmaceutical producers have expanded their use of Simulation Plus's software even though they've reduced R&D spending by 10%-20%.  The software has a proven record of lifting productivity.  The company is beefing up training to teach customers additional tricks.  It's also pursuing an in house effort to design molecules from scratch, as a demonstration project.  Entirely new applications also are emerging.  The F.D.A. is implementing the technology to study toxicology issues in food products.  As the related databases and mathematical models accumulate demand could arise among the food companies themselves.  Unilever already has licensed the core system.  Geographic expansion could reinforce performance.  Simulations Plus already is well established in Europe.  Efforts now are underway to penetrate China, India, Brazil, and other emerging markets.  Acquisitions could yield further leverage although it appears nothing is imminent on that front. 

We estimate non-GAAP earnings will advance 27% next year to $.23 a share.  Revenues could advance 20% to $15 million even if the text to speech line keeps trending sideways.  Cash flow remains positive so unless an acquisition is completed the company's share repurchase program could be re-activated.

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