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Simulations Plus, Inc. (Nasdaq: SLP), a leading provider of modeling and simulation solutions for the pharmaceutical, biotechnology, chemical, and consumer goods industries, held up well in the company’s recently released financial results. The firm also declared a cash dividend of $0.06 per share to shareholders.

Businesses and revenues

The company's main business is to develop simulation software for the discovery, exploration, and development of drugs; this includes the use of AI and technologies to predict molecular properties. In the software segment, Simulation Plus has three main software products, GastroPlus, ADMET Predictor, and MonolixSuite, which generate the bulk of the company’s income. As shown in its financial results for the second quarter, which ended February 28, 2022, revenues from the software segment represent 66% of the total revenues.

In the second quarter, the company achieved total revenue growth of 13%, including software revenue growth of 25%, compared with 16% growth in the same period last year. This is mainly due to the results achieved by the company's three software platforms. The improvement was largely driven by increased customer volume. GastroPlus' revenue grew 22%, ADMET Predictor posted 13% revenue growth, and MonolixSuite's revenue grew 43%.

Meanwhile, the Asian market has become a new growth engine for the company’s software business. Chinese pharmaceutical companies were among Simulation Plus’s new customers. Revenue from China grew by over 30% year on year. In January, the firm announced that it would increase prices by up to 10% in China. The new price dynamic should allow for further revenue growth from the Chinese market.

However, Simulation Plus’s services business has been less successful. The second-quarter report showed that revenues from the segment dropped by 5% year-on-year; the services business now accounts for 34% of the total revenues. The company attributed the contraction to pandemic-induced disruption which created a sizeable backlog in contracts. Specifically, QSP (quantitative systems pharmacology) /QST (quantitative systems toxicology) revenues declined 12% for the quarter while the backlog increased 78%. Revenue from PBPK (pharmacokinetics) services was flat compared to the previous quarter, but orders increased by 113%. The company expects revenue to return to strong growth in the second half of the year.

Cost and profit

In the second quarter of 2022, Simulation Plus reported a gross profit of $12m, with a gross margin of 81%. Its net income for the quarter reached $4.4m and diluted earnings per share were equivalent to $0.21. Adjusted EBITDA reached US$7.2m, representing 48% of total revenues. Remarking on the performance data, CEO Shawn O'Connor said: “We delivered double-digit revenue increases across our three major software platforms as a result of our increased upsell efforts and the addition of 18 new customers.”

In terms of costs, research and development expenses declined slightly compared with the previous year while sales and administrative costs were flat. Year-to-date R&D costs decreased to $3.3m or 12% of revenues compared to $3.5m or 15% of revenues in the last fiscal year. Capitalized R&D stood at $1.5m, equivalent to 6% of revenues, compared to $1.4m, equivalent to 6% in the same period last year. As of February 28, Simulation Plus is in a considerably more favorable financial position with $125m in cash.

What is to expect in the short-to-medium term？

Simulation Plus’s fiscal report for the second quarter was a stellar one that saw the company’s overall revenues increase more than 15%, matching previous quarterly growth. The sizeable backlog is likely to signify continued strong revenue growth in the near and medium-term. Continued revenue growth from software products coupled with the company’s successful expansion into the Asian market is likely to be the business’s core drivers going forward.

In the past six months, Simulation Plus partnered with a company in China to distribute its MonolixSuite modeling platform and extended its distributor agreement with a Japanese franchiser. The California-based firm also reached a deal to distribute the GastroPlus and ADMET Predictor products across South America. O’Connor suggested that the software business would continue to deliver accelerated growth rates which in turn would be a driving factor behind strong profitability. He added that the services business would recover soon. The company is confident it can realize its revenues growth guidance of 10%-15% for the whole year, O’Connor concluded.

Moreover, products developed by the company have become increasingly recognizable among experts. As the company described in the conference call, "GastroPlus was cited by 18 peer-reviewed journals this quarter, supporting our progress in mainstreaming simulation and modeling in drug development." Simulation Plus contends that its products are likely to draw further attention in the future.

As of April 6, Simulation Plus was valued at $960m. Its price-to-earnings(P/E) ratio and price-to-sales(P/S) ratio were higher and slightly above the industry average. In the last 20 trading days, its share price has steadily increased, reaching a 20% premium against the beginning of the year. While some indicators suggest that Simulation Plus has been oversold, its impressive performance in the second quarter and the strength of its products are positive signs for future growth.