Good afternoon, everyone. On behalf of Simulations Plus, I welcome you to our Third Quarter Fiscal Year 2020 Financial Results Conference Call and Webinar. Hosting the call today is Simulations Plus' CEO, Shawn O'Connor; and the company's CFO, John Kneisel. An opportunity to ask questions will follow today's presentations. You may send your written questions using the questions pane on your control panel, or you may use the hand raising icon on your control panel to ask your questions directly. Please be sure to enter your unique audio PIN displayed when you join the call.

Before beginning, I'd like to remind everyone that with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risk and uncertainties. The actual results of the company could differ significantly from those statements. Factors that can cause or contribute to such differences include, but are not limited to, continued demand for the company's products, competitive factors, the company's ability to finance future growth, the company's ability to produce and market new products in a timely fashion, the company's ability to continue to attract and retain skilled personnel, and the company's ability to sustain or improve the current levels of productivity. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

With that said, I'd like to turn the call over to CEO, Shawn O'Connor. Shawn?

Shawn O'Connor - Chief Executive Officer

Thank you, Cameron. This was an excellent quarter for Simulations Plus despite challenging economic conditions resulting from the COVID-19 pandemic. Fortunately the pandemic's impact to our company has been relatively minimal and in the third quarter of fiscal year 2020, we delivered another strong quarter of results. We've stated goal of delivering organic revenue growth of 15% to 20%, and we again exceeded that goal with 24% revenue growth in total, 18% organic revenue growth. This was our fourth consecutive quarter with total revenue growth in excess of 20%. Our software revenues represented 56% of our total revenue and grew 18% to $6.8 million, while our service revenue represented 44% of total revenue and grew 32% year-over-year to $5.5 million.

Notably, each of our operating divisions delivered double-digit revenue growth, ranging from 12% to 39%. Our gross margin improved to 78% overall, software gross margin was 90% in this - a seasonally high revenue growth quarter. Service gross margin rose to 63% in the quarter, driven by excellent performance by our Cognigen division. Excluding the effect of one-time transaction expenses of $1.1 million from our acquisition of Lixoft, our profitability metrics in the third quarter all showed improvement. SG&A expense was 32%, in line with our expectations of 35% for the year. Net income before taxes as a percentage of revenue was 40%, earnings per share excluding the impact of acquisition expenses was $0.20, up 25% over last year.

And finally, EBITDA as a percentage of revenue was 46%, again, excluding the one-time acquisition expenses. This was an excellent quarter for the company. Thankfully, the impact of the COVID pandemic on us here at Simulations Plus has been relatively minimal. From an operations perspective, we successfully transitioned our workforce to a remote model for most of the quarter with a small group beginning to return to work on a voluntary basis in June. Fortunately, prior to the start of our stay at home orders, we already had approximately 40% of our workforce working remotely and nearly everyone was equipped with the tools to make the transition from office to home rather seamlessly. As a result, there was minimal internal disruption to our business and productivity remains high. I anticipate the remote workforce percentage will remain high on an ongoing basis into the future.

Our workforce is highly engaged in the support of our clients and the pursuit of new business. We are advantaged with a portfolio of business that is largely insulated from the market cycles and shocks such as the COVID pandemic. A high percentage of our revenues, approximately 85% of our software revenue and 47% of total company revenue this quarter was derived from software renewals, which have experienced no impact to-date. Our service business operates off a large backlog, which we continually review and validate. Our backlog at the end of the third fiscal quarter was more than $12 million, representing more than three quarters worth of average service revenue into the future. At this point in time, we anticipate any impact to our backlog from the COVID virus will be less than 10%.

Just as important, our strong balance sheet and cash position are more than adequate to support the final - the ongoing operations of our business, initiatives for growth and track record of consistent quarterly dividends. We ended the quarter with more than $7 million in cash and added an additional $3.5 million credit facility as a backstop. Credit facility remains undrawn. That is not to say that we have not seen some impact during these difficult times. As previously communicated securing new business has been impacted as the pandemic has disrupted our client's decision-making and spending activities. For most of the third quarter, we experienced slowdown in new business closures both in terms of new software licenses, especially in Asia and new service business.

However, lead generation, virtual meetings, and presentations are continuing in both our Software and Services businesses. With the cancellation of most industry conferences, we have been able to conduct trainings and workshops virtually and have successfully transitioned sales activities from face-to-face to virtual meetings. As a result, our pipeline of vetted new business opportunities is growing. And exiting the fiscal third quarter at the end of May, we began to see an increase in new business closures for new software license agreements and consulting contracts. It's too early to assess whether the trend has changed but I am cautiously optimistic at this time. Finally, in addition to having Monolix from Lixoft and our sales offerings, we have introduced two new service offerings that have initiated bookings in the last quarter.

The two new service offerings are StrategiesPlus, which provides regulatory guidance to our clients, and our COVID Program which feeds consulting assistance to any organization involved in coronavirus research. Both are generating new opportunities and bookings. Let me now turn to a brief comment or two specific to each division. At our Lancaster division, revenue was up 12% to $6.7 million for the quarter. Breaking this down, 79% of Lancaster revenue was derived from renewals, 10% from new sales, and 11% from consulting services. In our Software business, renewal rates remained high at 88% on an account basis and 94% on a fee basis. New licensing units grew by 10% year-over-year. Our new regulatory services offering generated approximately $250,000 in bookings during the third quarter.

And we added 11 new commercial companies including new licenses in the U.S., Europe, Japan, and Brazil, while also expanding our presence with nonprofits research groups, academic institutions, and regulatory agencies. We're engaged in Lancaster in projects with 28 companies and seven funded elaborations. We ended the quarter with 45 full-time employees at our Lancaster division, up one from 44 in the prior order, and up four from 41 last year. At our Buffalo division, revenue was up 20% to $3 million for the quarter. Just as important, we made significant improvement in our gross margin, which increased to 56% of revenue, up from 52% in the year-ago quarter as the division focused on internal project process efficiencies. We signed 33 contracts and initiated 18 new projects during the quarter.

Overall, we have 64 active projects across 31 companies and 28 proposals outstanding with 24 different companies as of July 1. We ended the third quarter with 45 full-time employees at our Buffalo division, down seven from 52 in the prior quarter, and level with 45 last year. These comparisons are impacted by a reduction implemented in software development staff no longer required to support project work efforts. The underlying growth of consulting staff is 41% year-over-year. Our DILIsym revenue increased 39% for the quarter to $1.9 million. Breaking this down, revenue related to DILIsym Software and Service projects represented approximately 55% of the total. RENAsym model services represent 5%, IPF model services represented 22%, and RENAsym grant service revenues represented 10%. And finally, the heart failure model contributed revenues totaling about 8%.

DILIsym has 13 active consulting projects and seven active Consortium contracts at this time. We ended the quarter with 21 full-time employees at our RTP division, up three from 18 in the prior quarter and up four from 17 last year. During the quarter, we completed our acquisition of Lixoft, the developer of the highly regarded Monolix Suite, a modeling platform that covers a wide range of data types and statistical features for population PK/PD modeling that is widely used by academia, pharma, and regulatory agencies. This acquisition immediately expanded our presence in Europe and rebalanced our mix of software and consulting revenues with a shift weighted more towards software licensing. Lixoft contributed two months of performance to our results in the third quarter totaling about $600,000 of revenue, which represents a 15% growth over their revenues in the same period last year, while independent - operating independently.

The customer count is 52, a 23% increase over last year and their software renewal rates are 84% on fees and 98% on accounts. Post-acquisition integration efforts are going well. These efforts are focused in four primary areas. First, the integration of Monolix into existing direct and distributor sales processes; second, the evaluation of integrated software product development plans; and third, the initiation of Monolix-based consulting service offerings, and the training of our consulting staffs on the platform. Finally, the integration of the Lixoft organization into the company's business processes and infrastructure where appropriate. I'm pleased to report that while just at their beginnings, progress is being made across all these objectives.

I'll now turn the call over to John to review the detailed financial results. John?

John R. Kneisel - Chief Financial Officer

Thank you, Shawn, and good afternoon, everyone. As Shawn indicated, this was an excellent quarter for Simulations Plus. Our consolidated net revenues for the third quarter of our fiscal year 2020 were up 23.8% or $2.4 million to $12.3 million from just under $10 million the prior year. The third quarter represents the fourth consecutive quarter of revenue growth greater than 20%. On an organic basis, which includes the Lixoft - which excludes the Lixoft acquisition, our revenue grew 18%. Organic revenue remains steady in the high-teens despite current economic conditions triggered by COVID-19. The general sectors we operate in software and life science, pharmaceutical have tended to maintain momentum in the midst of pandemic. Consolidated software and software-related sales increased $1.03 million or 17.7% over the prior year quarter.

Lixoft Software sales accounted for $566,000 or 55% of this increase. Consolidated and analytical study revenues increased $1.33 million or 32.4% over the third quarter of '19. Cost of revenues increased 14.7% or $341,000, resulting from increases in labor-related costs and direct expenses on contracts. We saw a decrease in travel and travel-related expenses of a $154,000. This training was done online due to travel restrictions. In addition, this quarter we recorded a benefit for royalties of a $189,000 as the royalty agreement reached the final determination and amounts we had accrued were recognized back into income. Total gross profit increased 26.5% to $9.6 million, representing a 78.3% gross margin in the third quarter of the fiscal year. Historically, our highest quarter seasonally compared to a 76.6% gross margin in the same quarter last year.

Overall, software margins were 90% and consulting margins were 63%. SG&A expenses including the one-time M&A charges associated with the Lixoft acquisition of a $1.1 million in the quarter were $5 million or 41% of revenue for the third quarter of the year, an increase of approximately $1.9 million or 62% compared to the prior year. The increase in SG&A expenses was primarily the result of the decrease in selling expenses and commissions, increases in salaries and wages and labor-related benefits as well as contract labor for outsourced services in support of company growth. A $195,000 of the increase came from our new subsidiary during the two months since acquisition. And as I indicated earlier, we incurred approximately $1.1 million of acquisition-related cost in the quarter for legal, accounting, due diligence and M&A banker related fees.

Without M&A transaction-related costs, SG&A would have been approximately 32% of revenue and we don't expect any substantive additional M&A transaction-related expenses in the fiscal fourth quarter nor do we foresee any material amounts of integration costs at this time. Research and development expenses for the third quarter were approximately $1.36 million. Of this total, $753,000 was expense and $606,000 was capitalized. This compares to approximately $1.07 million prior year in spend and at that point $643,000 and $422,000 was capitalized. Income from operations was $3.9 million for both the third quarter of fiscal year 2020 and 2019, remained flat year-over-year on higher revenue primarily affected by the one-time M&A-related expense of our acquisition of Lixoft. Our provision for income taxes in the third quarter of the year was $844,000 with an effective tax rate of 22.3% compared to an effective rate of 25% in the prior year.

The rate is lower this period, mainly due to the effect of stock compensation-related deductions. We expect our tax rate to end up in the 22% to 25% range for this fiscal year. Net income increased 1.6% or approximately $47,000 to $2.9 million in the third quarter of this year compared to $2.9 million in the prior year. On a per share basis, net income was $0.16 per diluted share in both this fiscal year and last year. The Lixoft-related transaction lowered diluted earnings per share by approximately $0.04 per share. EBITDA was $4.6 million in the third quarter of both the fiscal years, this fiscal year and last year. Now, turning to the next slide with the nine month, nine months year-to-date comparisons; consolidated net revenues year-to-date were up 23.5% or $6.1 million to $32 million compared to $25.9 million a year ago.

Our gross margin for the first nine months of fiscal 2020 was 75.1% compared to 74% in the year-ago quarter - the year-ago period, an improvement of 110 basis points. SG&A expenses including $1.4 million of one-time M&A transaction related costs were $12.6 million or 39.4% of revenue for the first nine months of fiscal year 2020 compared to 8.6% or 33.2% of revenue for the same period last year. Research and development expenses were $3.8 million for the first nine months, up about $500,000 from $3.3 million the prior year. The expense portion increased $130,000 to $2.03 million. Year-to-date R&D expense is at 6.3% of revenue, down from 7.3% in the prior year. Income from operations for the first nine months of fiscal 2020 was $9.4 million compared to $8.7 million.

The net income increased by approximately $620,000 or 9.5% to $7.1 million. Diluted earnings per share was $0.39 per share compared to $0.36 for the same period last year. The software-related - the Lixoft-related transactions lowered EPS by approximately $0.06 per share year-to-date. EBITDA was $11.5 million year-to-date, up 7% from the prior year. Turning to some graphs, this graph shows consolidated quarterly revenues. The third quarter of each fiscal year is typically our strongest, followed by a decrease in revenue in the fourth quarter that coincides with the slowdown in our clients' purchasing in the summer months. Once again, the first through third quarters of fiscal 2020 follow the same upward trend. The next slide represents operating income by quarter, illustrating a consistent track record of increases both year-over-year and sequentially through the first and third quarters with the fourth quarter lighter for the year.

As you can see, the patterns for quarterly revenues and quarterly income from operations is largely held true for quite a number of years. This quarter we were flat compared to last year. Again, the result of $1.1 million of nonrecurring and nonoperational costs related to the Lixoft acquisition. The next slide of consolidated net income by quarter, we can see that similar pattern in net income in the third quarter typically being the strongest. The graph isolates the impact of a $1.5 million deferred tax benefit in the second quarter of fiscal year 2018, since it tends to skew the presentation without highlighting that difference. And again, this quarter we were flat compared to last year, the result for the cost of the Lixoft acquisition. On the next slide, diluted earnings per share follow the same pattern. It tracks with net income as expected.

As I mentioned earlier, fiscal year 2020 third quarter diluted earnings per share were $0.16 and included M&A transaction cost for Lixoft. Excluding those non-recurring expenses, earnings per share would have been approximately $0.04 more. Turning to EBITDA on the next slide, again, the patterns hold for EBITDA with the overall trends moving upward into the right and typical seasonality exist between the quarters. Let me mention one thing about the trends in our fiscal performance. Like so many, we are unable to truly predict all the possible future impact of COVID-19 with any degree of certainty. However based on our current visibility, we expect the seasonal nature of our revenue in sum and EPS to continue in the coming quarters based on our annual software revenue renewal model consulting backlog and our pipeline of new business opportunities.

This slide shows our revenue by region on a year-to-date basis. We saw globally with the majority of our revenue in the Western Hemisphere. Approximately 69% of revenues were in the Americas year-to-date this year while Europe representing 16%, and Asia 15%, half of which sales were derived from sales in Japan. On the next slide it illustrates our strength of our cash position with a quarterly view of our cash balance and how we've used funds for investing through acquisitions and returns to shareholders in the form of cash dividends. The red line indicates lower points of cash at times when we have invested in acquisitions. The green bar represents cash used for acquisitions of $6 million, net cash paid in the most recent quarter for our acquisition of Lixoft. Cash flows from operations have allowed us to invest for future growth through acquisitions, while maintaining healthy balance sheet.

After each acquisition, you can see a pattern of cash accumulation. Beginning with the first quarter of '17 on the far left, the blue bar at the bottom illustrates a consistent dividend payout with approximately $900,000 per fiscal year through fiscal year '17. And then beginning of '18, the board increased the dividend payment to $0.06 a share, thereby returning a $1 million to $1.1 million in cash to our shareholders quarterly through the present quarter. Today in our press release, we again announced that the board of directors has voted to continue the $0.06 quarterly dividend. The next dividend payment will be August 3rd. Our reinvestment through acquisition has exceeded $16 million over the last four to five fiscal years while we have also returned more than $15 million to our shareholders through consistent dividend payouts without the use of any borrowed debt.

During the third quarter, as Shawn mentioned before, we established a $3.5 million line of credit with a Commercial Bank under the terms of the LLC drawn amounts in current interest at prime rate or at a fixed rate based on LIBOR plus 175 basis points. It's a two-year agreement and there are no charges for undrawn line amounts. At the end of our third quarter, we had nothing drawn under the facility and do not anticipate a need to access the line in the near future. However, it does provide us with access to liquidity should the need arise. Turning to the next slide with the balance sheet metric; at the end of the quarter cash was at $7.4 million, which was down 35% compared to the last fiscal year, primarily the result of cash used in the acquisition of Lixoft. Deferred ratios and liability changes are mainly the result of any acquisition liabilities booked. Our balance sheet remains strong with excess cash and zero borrowed debt. With our continued cash flow generation and a prudent approach to allocating capital, we are well-positioned to support our continued growth and protect our business during economic cycles.

Shawn, I'll turn the call back to you now.

Shawn O'Connor - Chief Executive Officer

Thank you, John. Additionally, today we filed an audit - a Shelf Registration on Form S-3 with the SEC. The registration statement and prospectus allow the company to register various securities, including common or preferred stock, as well as warrants and/or depository shifts. We have not filed a specific perspective supplement to initiate an offering at this time, but it put the Shelf Registration in place for use in the future and in support of working capital, M&A, and other general corporate purposes. Our recent qualification under the well-known seasoned issuer rules made this undertaking timely and efficient. In conclusion, we are well-positioned to continue our record of strong financial performance and encouraged by the prospects for our business despite the lingering unknowns related to the COVID pandemic.

We are out of the gate strong with the integration of Lixoft and encouraged by opportunities that that business opens up for us, particularly in Europe. Demand for our solutions remains strong, although we may experience delays in the timing of customer orders. We're confident any short term disruptions of the flow of new license orders will not impact the long term prospects for our business or the thesis for investing in Simulations Plus. We expect double-digit year-over-year revenue growth in the fiscal fourth quarter despite the impact of seasonality on a sequential basis.

With that, I'd like to turn the call back to the operator, Cameron and take any questions that you might have.

Question & Answers

Questions and Answers:

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Cameron Donahue - Partner and Regional Vice President

Thank you, Shawn. [Operator Instructions] And our first question comes from Matt Hewitt, the analyst with Craig-Hallum.

Matthew Hewitt - Craig-Hallum - Analyst

Thank you for taking the questions and congratulations on the strong third quarter.

Shawn O'Connor - Chief Executive Officer

Thanks, Matt. How are you doing?

Matthew Hewitt - Craig-Hallum - Analyst

We're hanging in there. I guess, first off, could you maybe talk a little bit - and you've touched on this but I'm wondering if you could talk a little bit about the cadence? We know that there was a little bit of slowdown on new customer bookings in the quarter but how has that cadence changed I guess as the quarter progressed and where does things kind of sit now? Are you seeing a stronger uptrend there or is it still some hesitancy?

Shawn O'Connor - Chief Executive Officer

Well, yeah, I'd describe it this way, Matt. We went into the quarter with a reduction, reducing our expectation in terms of new licenses, new consulting contracts. So we saw that in the last month of our second quarter and went into the third quarter anticipating a relatively slow pace. That slow pace came to reality and during the year, our closure of new business was a little below what historically we've seen. We did see as we entered the last month of our quarter in May, that things pick up a little bit and look at that very optimistically. But I just don't know that it's something a trend change that we can hang our hat on just yet.

And so we're cautiously looking into the fourth quarter but we will remain impacted by COVID slowdown. As we look at our customers across the board kind of like the pandemic response in general, I think people started to come back and activity started to pick up. And maybe has taken a little step back as infection rates, etc, stepped up. And so I want to be optimistic. We certainly did better than we anticipated on reduced expectations in May for the last month of the third quarter. And I'd like to say that that's a positive uptick, a positive trend forward but I don't think it's a big enough data point for us yet to say that things have turned in the marketplace for us. But we'll remain cautious as we go into the fourth quarter.

Matthew Hewitt - Craig-Hallum - Analyst

Understood. Okay. And then I guess kind of moving down the income statement, gross margin that was your high watermark going back to all the way to Q3 of 2017. How sustainable, and I appreciate some of the seasonality, but how sustainable is this gross margin given some of the changes in working from home and kind of the mix adding Lixoft with the higher software margin, but how should we be thinking about gross margin?

Shawn O'Connor - Chief Executive Officer

Yeah, I don't see that anything too significant has happened in there other than a recent improved margins out of the Cognigen Consulting operations where we found some efficiencies and started to implement them and they had a very good quarter. Again, the third quarter is our highest revenue quarter from the seasonality perspective. And so, we benefit as we add expenses on more or less a linear basis through the year, our peak revenue is - a rise here in the third quarter and then as the seasonality dictates will step down in the fourth quarter and you'll see the pattern on an annual basis is pretty consistent that that gross margin will be impacted in the fourth quarter.

So, I point you to the year-over-year gross revenue results to - little bit improved over last year as well. So, we're seeing some improvements there. Obviously, Lixoft coming into the mix adds more software, high gross margin software to our mix takes our overall revenue back to more - closer to 55/45 split between the two sources of revenue, and that certainly have helped gross margin as well. So, that improvement on the uptick but as you model and look forward keep in mind that there's a seasonality factor in play here.

Matthew Hewitt - Craig-Hallum - Analyst

Got it. All right, maybe one more and then I'll hop back in queue. Given the strong performance that you put - been putting up and the balance sheet, your profitability, is there - have you had any discussions internally with the board regarding maybe taking on a little bit of risk with some of your customers? And what am I - I guess asking is, is there any chance that you could start to look at some of your customers and say, instead of charging you X, we would be interested and essentially partnering with you or we're going to collect milestones and royalties as your pipeline opportunities are successful. Has that discussion come up and what are your thoughts on that type of a model?

Shawn O'Connor - Chief Executive Officer

It's a big change in terms of our model today being a traditional mix of software and consulting revenues. We've always focused on returning very good profitability metrics on a quarterly basis. A change to a royalty milestone betting on the future would impact that tremendously. So that will be a significant change in our approach. We certainly do look at situations where can we package our services in different forms of service offerings that may lead us into areas where we're looking at delivering consulting results that - for the client that helps them today doesn't pay off for them until longer route - longer term down the road, which might prompt royalties into the discussion. We're not close to making any of those sort of changes in our business model at this point in time and feel comfortable that we're able to deliver a good value to our clients at a good return to us and the shareholders and the current model today.

Matthew Hewitt - Craig-Hallum - Analyst

Fair enough. All right. Thank you.

Cameron Donahue - Partner and Regional Vice President

Thank you, Matt. And our next question is from Kevin Gade of Bahl & Gaynor. Kevin, your line is now live.

Kevin Gade - Bahl & Gaynor - Analyst

Hi. Good afternoon and congratulations on a strong quarter. I just wanted to bring up the shelf registration. It seems like some of the commentary discussed the timeliness of being able to become a serial issuer. Is this timely in the sense that you are looking to engage more in M&A? And if you do so, are you looking to use anything other than accumulated cash on your balance sheet? Thank you very much.

Shawn O'Connor - Chief Executive Officer

Sure. Sure. Yeah, certainly it's something - shelf registration is something that we've looked at for some time and considered to be appropriate for a company in our size, shape and whatnot achieving the [Indecipherable] threshold a month ago, put us in a position where the ease of filing that registration statement was facilitated immensely in the review period, being a big piece of it and other benefits as well. In terms of its potential use out into the future, it doesn't change our approach in terms of modeling but merger and acquisition activity. It's an ongoing effort on our part. We closed Lixoft a couple of months ago.

The third acquisition the company has made and as I've said before, we've done it on kind of an every three-year basis and I hope that that window was shortened and we're able to move, identify and take action on appropriate target candidates on a appropriate pace here. The shelf there being - there it will allow us some leads and speed in terms of responding depending on the nature of those transactions and the need for shares and/or cash to move on those. We've maintained our cash position already and as we've done with the other acquisitions, funded them out of existing resources, existing capital. If anything, this might give us an opportunity to look at target opportunities that are a little bit more [Indecipherable]. Hope that answers your question.

Kevin Gade - Bahl & Gaynor - Analyst

Yeah. That's very helpful and maybe if you can discuss briefly the valuation of some of the targets that you're - that you're been looking at? Is the opportunity set within your expected range, perhaps some intriguing? And then lastly, you have brought - you had put out a PR about partnering with COVID research organizations. Has there been any product wins related to COVID-19 either antivirals or vaccines from Simulation Plus?

Shawn O'Connor - Chief Executive Officer

In terms of the M&A target list and into values run from small to large, large to [Indecipherable] historically as to what we - we have an appetite to - that can write-off the three previous transactions, we're all in sort of $20 million and below size. As I said, the target list, if you will, might expand in terms of its valuation size as we go forward. With regard to the COVID efforts out there, yeah, it's been a fast and furious market. We tried to be a good citizen and in many ways contribute some of our knowledge or past experience and model efforts to-date on a graphics basis in some scenarios, counting on the fact that they would translate to commercial opportunities going forward. We've got some small realities in that regard. And we've got a pipeline of discussions and grant proposals and the number of opportunities in process and in pipeline going forward.

Kevin Gade - Bahl & Gaynor - Analyst

Great. Thank you so much.

Cameron Donahue - Partner and Regional Vice President

Thank you. [Operator Instructions] And while we pull for additional questions, I will go through some of the questions that have been sent in. The first question is from Howard Halpern with Taglich Brothers. His first question is what will drive improvements and potential growth in operating margins over the next 12 months?

Shawn O'Connor - Chief Executive Officer

Well, obviously, the two biggest impacts on those percentage results, operating expenses and gross margin are; A, our overall revenue growth. And as we get larger, there are certain fixed expenses that don't rise with the revenue growth and we'll see a little bit of improvement there. The other big impact is the mix of our software and consulting revenues. Consulting opportunities, consulting revenue continues to grow at 30% plus ranges and the software in the 15% level. And so we have a continual mix change that takes place. We look to keep that in the favor of software through internal development of products and driving existing portfolio of software products, revenue growth at a faster pace. And then obviously, as with Lixoft, add to the software side of our business through acquisitions going forward.

Cameron Donahue - Partner and Regional Vice President

Thank you, Shawn. Next question from Howard is, over the next 12 months, what are the growth prospects for the European subsidiary?

Shawn O'Connor - Chief Executive Officer

Lixoft has very consistently grown the last couple of three years at 30% top line growth rate. They've enjoyed a little bit - the rule of small numbers there as they climb their way to a $3 million to $4 million annual level of revenue. We are pleased with their results in the first couple of months here. We only get a partial quarter. And as they come on board, they are seeing the same impact that our existing software business has encountered as a result of COVID situation. So, their growth rate has to shoot here as are the Simulations Plus family. I would anticipate it may come down from that 30% growth level that they've enjoyed for the last few years. But in the long run, they certainly will grow in the 15% to 20% range that we've been touting here in terms of our ability to grow on an organic basis.

They should fit well into that and might be able to contribute at the higher or above side of that depending on how quickly and when and how we come out of the COVID scenario. Their revenues are a 100% software upon acquisition, 99% I guess. There are some small contribution on the service side but that's an upside. And so in terms of looking at Europe and really globally, our ability to take advantage of consulting business that is drawn to or tied to the Monolix Suite application presents an opportunity for contribution in revenues going forward as well. So an exciting addition to the mix here and gotten up to a very good start in the first couple of three months since I've joined the team and look forward to seeing what we can do with it going forward.

Cameron Donahue - Partner and Regional Vice President

Thank you, Shawn. The next question from Howard is on top of the $5 million five-year KIWI contract. Has KIWI in the offering made any inroads as the need for security is increasing during the drug development process?

Shawn O'Connor - Chief Executive Officer

I'd say, of late, certainly, making big investments in KIWI like data repository decisions impacted probably more significantly than analytical tools like GastroPlus, Monolix. Those are the types of decisions that have them shelved in terms of our clients out there in the marketplace. So I think my response there is no, not seen any uptick in that area of our businesses.

Cameron Donahue - Partner and Regional Vice President

Great. Thank you. The final question from Howard Halpern is for modeling purposes, what is the likely quarterly increase and D&A expense related to Lixoft acquisition?

Shawn O'Connor - Chief Executive Officer

D&A expense, I presume, it maybe a type of SG&A expense and.

Cameron Donahue - Partner and Regional Vice President

That's Depreciation and.

Shawn O'Connor - Chief Executive Officer

Yeah. Well, yeah, at the SG&A's level certainly I'll respond, their model fits in right with ours and so our expectation that we're kind of operating on an annualized 35% SG&A level, looks like it will fit right into that relatively small operation and it's consolidation into our numbers, no dramatic change there. It's more cash-oriented in terms of EBITDA percentage. Lixoft is a fine addition and will contribute more significantly and more positively on an EBITDA sort of perspective because their overall margins are even better than our pre-consolidation EBITDA percentages at Sim Plus. So, they will contribute disproportionately in terms of increasing cash flow and EBITDA.

Cameron Donahue - Partner and Regional Vice President

Thank you, Shawn. And we have a few written questions from Brett Tasakiyo [Phonetic] but he is on the line live, so we'll let them ask those questions live first and then follow-up with any of the written questions that he submitted. Brett?

Brett Tasakiyo - Analyst - Analyst

Hello, I'm here.

Cameron Donahue - Partner and Regional Vice President

Your line is live. Great.

Brett Tasakiyo - Analyst - Analyst

Can you hear me?

Shawn O'Connor - Chief Executive Officer

Yeah, go ahead Brett.

Cameron Donahue - Partner and Regional Vice President

Yes, you're live.

Brett Tasakiyo - Analyst - Analyst

Yeah. Thank you for taking my question. The first question is what is your current marketing/sales approach to distributing your software or other pharma companies, chemical companies, etc? And do you have any plans to expand your proprietary software to the enterprise resource planning space outside of pharma, bio, chemicals or more so manufacturing and other markets? And then the second question is Japan seems like a huge opportunity for you that is crying for penetration growth. What is your sales and marketing approach there to grow revenue?

Shawn O'Connor - Chief Executive Officer

Sure, Brett. I'll walk through them. Our current sales process is both direct and through distributors. The distributor network is utilized in the Asian markets and the rest of the world is a direct sales effort on our part. Turning to I guess second part of that question is in terms of the expansion outside of the pharma space, not as far reaching as generic ERP spaces, manufacturing. We do impact and can impact certain pharmaceutical manufacturing decisions and activities. But the question is from answer sort of perspective of deploying our modeling and service to a wider range of industries, the answer is no. But we'll stay focused in our pharmaceutical space and the adjacencies to that. The Japanese market is yes, one of the larger non-North American markets, Europe and Asia being the two big markets for us outside North America.

Japan as I said, we use distributors there for our software products. And on a consulting side, we do some business in Japan. We do a fair percentage of business for Japan through their Japanese representation companies here in North America, their subsidiaries in North America. The opportunity, just at some point in the future, seeing other consulting organizations that are [Indecipherable] success when they have consultants on the ground in Japan would contribute I think to a greater capture of market share in that regard. And that's something that we certainly look at in the future but haven't pulled the trigger on doing something of that nature at this time. Hopefully that touches all your questions.

Cameron Donahue - Partner and Regional Vice President

Thank you, Shawn. And then we have one follow-up question from Kevin Gade. I'll unmute his line now. Kevin, you're now live.

Kevin Gade - Bahl & Gaynor - Analyst

Hi. Thanks again for taking my follow-up. My question is just generally if you can kind of speak to the resilience of the software modeling industry within the pharma space and maybe talk about the long-term growth aspect? Just seems like this - where you are in the drug creation spaces is almost perpetually growing. So just perhaps talk to any puts and takes to what you have seen over the past several months as it looks to the future? Thank you.

Shawn O'Connor - Chief Executive Officer

Sure. Sure. Yeah. It's an exciting market for me from my perspective of having been involved for 20 years now. Those early days with banging our head on a cement wall at a large pharma company and trying to get that initial adoption initiated, we've come a long way from that point in time. And today, it's certainly accepted and adopted and flourishing in terms of this expanded application, both along the timeline of discovery to approval, and as well as the various means through the - between those two points in terms of impacting decisions, prioritizing molecules, affecting bioequivalence decisions, impacting FDA response to submissions, the list goes on. And we've been gated over time as well by the available resources that are out there - number of scientists that have this relatively unique mix of math, statistics, biology chemistry, etc, that are able to drive the software to grow.

We stay - have numerous academic organizations producing candidates that are populating the field and allowing more resources in that regard that is supporting the growth and adoption of modeling and simulation in the pharma space. I look at one of the silver linings of the COVID pandemic here, if we can search for those things is the heightened awareness of, gee it takes too damn long to develop a drug and it seems to be such a painful process, how can we improve it? And that's what modeling and simulation delivers to the industry. So, we're getting some attention. It's well deserved. We can be very impactful in terms of the efficiency and effectiveness of the drug development cycle. And as I look out into the future, I don't see any end to this expansion of application of modeling and simulation in new and different ways that can impact our clients and very excited about the future for modeling and simulation.

Kevin Gade - Bahl & Gaynor - Analyst

Great. Thank you.

Cameron Donahue - Partner and Regional Vice President

Well, thank you, Shawn and this concludes the conference call today. Thank you, everyone. If you've missed any part of today's conference call, the replay will be available on our website, www.simulations-plus.com. Thank you and look forward to the next earnings call to further our dialogue. Thank you.

Shawn O'Connor - Chief Executive Officer

Thanks, everyone.

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SIMULATIONS PLUS INC

Q3 2020

Earnings Transcript

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