Simulations Plus Inc (SLP) 2011 Q4 法說會逐字稿

Good afternoon. It's Thursday, December 1, 2011. And on behalf of Simulations Plus I welcome you to our fourth quarter and fiscal year 2011 financial results conference call and Webinar. Chairman and Chief Executive Officer, Walt Woltosz will be presenting this afternoon. Joining Walt as panelists are Chief Financial Officer, Momoko Beran and Director of Marketing and Sales, John DiBella. An opportunity to ask questions will follow Walt's presentation. (Operator Instructions) This call is being recorded for playback at our website, www.simulations-plus.com. It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

Thanks, Renee, and welcome everyone to our fourth quarter and fiscal year 2011 conference call. I'll read the Safe Harbor statement as I usually do in case anybody is not able to see it on their screen.

With the exception of historical information the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the Company could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, continuing 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 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.

So, 4Q 2011, fourth quarter of fiscal 2011 ended August 31 and our 10-K was filed here a couple days ago. The fourth quarter compared to 4Q of 2010, fourth quarter was our 16th consecutive profitable quarter and made 38 of the last quarters -- 40 quarters were profitable. Our sales were down a little bit on a consolidated basis to $2.12 million from $2.21 million. However, the pharmaceutical segment sales were up 7% to $1.43 million which constitutes a record fourth quarter for the pharmaceutical segment of the business. Words+ subsidiary sales were down a little bit over 20% for the fourth quarter. That's why the consolidated sales were down.

Net income was down about 46% to $186,000 from $345,000, and diluted earnings per share down to $0.01 from $0.02. A lot of that is due to additional overhead as part of our activities related to the attempted acquisition of Entelos and the legal and other costs associated with due diligence which we partly in the fourth quarter and partly in the first quarter of this fiscal year. For the whole fiscal year sales were up on a consolidated basis 9.4% to a record $11.72 million, from $10.71 million in fiscal year 2010. Pharmaceutical segment sales were up 14.7%, reaching $8.74 million, from $7.62 million in the previous fiscal year. The sales of our Words+ subsidiary were down 3.6% to just under $3 million from just over $3 million last year. Net income, however, on a consolidated basis was up 25.9% to $2.71 million from $2.16 million. And our diluted earnings per share for the fiscal year were up 29.3% to $0.17 a share from $0.13 last year.

Our balance sheet at the end of August was strong, continues to be strong and growing. The cash was $10.2 million. Cash today, you can see on the screen, is $12.3 million after closing the sale of Words+ yesterday. That cash is also after using a little over $2 million, $2.07 million to repurchase shares during fiscal year 2011. Shareholders equity, up 7.6% to $14 million from $13 million a year ago, September 1, 2010. And equity per share up 9.4% to $0.90 per share from $0.82 per share at September 1, 2010, and of course we continue to have no debt.

Consolidated revenue by quarter, you can see here for the last four fiscal years, quarter by quarter, as usual fourth quarter is our lowest quarter, although the fourth quarter now you can see is on a par with first quarter and second quarter in the four year ago time frame where you see the first bar is in each of these quarterly listings. So fourth quarter is growing, down a little bit this year. Again, the sales of pharmaceutical was up, but the sales for Words+ was down. And you can see here, the revenues by division here, so the darker blue bars are for the pharmaceutical side of the business, software and services. The green bar is for the Words+ portion of the business and gross margin here, I forgot to change the color of -- at 73%. It's not red because of any alarm. It's red because I had a red color there for someone to fill in for me and I forgot to change the color back to black. So we're still running in the 70s, mid-70s gross margin and, again, that includes the lower performance of Words+ in the fourth quarter as well as the additional overhead cost for our business development activities.

Income before taxes, similarly. So profitable again. Last year we had a nice bump in Q4 but if you took that one out you'd still see an increase for the other three Q4s that are shown here. And the net income by division, there's a slight green bar here for Words+. It's very close to the line. I think it was about $11,000. And that actually was primarily due to an adjustment in the allowance for bad debts that we allowed too much for bad debts in previous years and so we recovered some of that, so on an operational basis it would actually have been negative but it came out a little bit positive with that adjustment.

Consolidated income statement, you can see our pharmaceutical software services and revenue increased quarter-over-quarter. Words+ revenue significantly down for the fourth quarter unfortunately and consolidated revenue then slightly lower. Gross profit, a little bit lower, gross profit margin, you can see here. SG&A, up again, due to a number of factors but largely due to business development activities. Income before income taxes down about 50% from the previous year again because of those things and net income you can see here and earnings per share, $0.012 for the fourth quarter compared to $0.022 last year.

Some selected balance sheet items. Cash and cash equivalents, against, about $10.2 million from about 9.6, and that's after using about a little over $2 million to repurchase shares during the fiscal year. Shareholders equity increasing by about $1 million. Again, that's after $2 million being spent to repurchase shares.

The big news has been the sale of the Words+ subsidiary. This was the original company. This is what we founded 30 years ago in 1981. Celebrated our 30th anniversary in September and it was pretty clear that the shareholders and the Board of Directors thought that the two businesses were so different that we really should focus on the pharmaceutical business. And so over the last few years we haven't put the effort and resources into the Words+ business that we have into pharmaceutical and it really needed a new home. Fortunately, we found an excellent home for it with the Prentke Romich Company in Ohio. They've actually been around about 15 years longer than Words+. Both Prentke Romich, Words+ and a couple other companies were the pioneers in this field back in the early 80s and for them actually starting in the late '60s.

We have known each other for many, many years. We've worked together in some ways. We were sponsoring tours of the country to go out and present seminars about augmented communication and the type of technology that was involved. So it's not like we're strangers to each other. The transition has gone very smoothly. The deal did close yesterday and the proceeds that went into the bank after networking capital adjustments from the end of the fiscal year were just under $2 million, about $1.98 million.

This is going to have some significant effects on us. Our employee count now will be about 24, where it was 39. Our auditing and legal fees we expect to be reduced. The inventory alone for Words+ was substantial. The number of SKUs or particular products in the catalog was large. The number of agencies through which orders were processed, state Medicaid, Medicare, insurance, Blue Cross, [Kaiser], all of those, school districts, there were a large number of entities that had to be dealt with, each one having their own specific forms of legal agreements and so on, and so it's going to be quite a simplification when we focus just on the pharmaceutical business which is a more focused business with a smaller number of transactions of larger monetary value.

Our accounting and reporting because of that is all going to be simpler. The reviews will be simpler for both internal reviews and external. Our internal controls will be much simpler. The Sarbanes-Oxley type of controls where we have to make sure that all of the inventory that we have is properly accounted for, that accounts receivable and all of the other issues are properly accounted for so that our financial reports are correct. There will be far fewer transactions now and so -- and far fewer things to keep track of, so we expect the internal controls to be much less of a burden. Of course our revenues will go down by about $3 million a year. We will not have the Words+ sales and we will also have some increased office space at some point.

Through the end of December, all of the operations will remain here but beginning January first, some of the operations will be in Ohio and later in 2012, a few more of the operations will be closed down here. So depending on what PRC would like to do as far as subleasing space for the operations that remain here, if they decide to stay in this building or if they decide to move out to their own location, that will affect how much additional office space we do have and actually we do need some. We're just about full. In fact, we're using some rooms that really weren't intended to be full size offices for PhD scientists, but that's all we have. We'll have a few more nice offices to expand life sciences staff. Of course, that will increase our lease cost to Simulations Plus. In the interim, as PRC is leasing, subleasing some space for us that will end up being reflected as other income.

The balance sheet is going to be stronger. Of course, we have the increased cash already but we'll also have decreased total liabilities. For example, the accrued vacations for Words+ employees were all paid off as all of the Words+ employees were terminated as of yesterday and became either PRC employees or employees of a temp agency. We do expect our profit margin and net earnings to increase. Unfortunately, the performance of Words+ in the last quite a few quarters has not been helpful. You can see the difference in the numbers when you compare consolidated versus pharmaceutical only. And we'll be able to focus our energies and our resources on the pharmaceutical software and services business without having to deal with the additional operations of Words+ subsidiary.

So going forward, Words+ will be reported as discontinued operations. We did have, of course, the first quarter ending yesterday with both companies operating but from now on we'll be reporting just as pharmaceutical software and services, and the next slides show the past financial performance of the pharmaceutical side. So this is what you're going to see going forward, except that going forward we're going to make some adjustments to these numbers on a pro forma basis and that will be included in an 8-K filing in the next three working days. I think that answers one of the questions that I see in the list of questions.

There should be some increase in lease costs at some point. Sub lease income will be generated to offset that for a while. Insurance and other overhead costs are expected to decrease. Accounting and legal costs are expected to decrease and I know Momo, our Chief Financial Officer, is working very hard to get this pro forma financial statement done. It's been, as you might imagine, a marathon, a lot of nights and weekends getting everything done so that we could get this deal closed by the end of the first quarter and not have anything carry into the second quarter.

So looking just at the pharmaceutical business, you can see these are the revenues by quarter for pharmaceutical software and services by itself and a nice growth pattern. And then on a fiscal year basis you can see this slide, the annual revenues for just that business segment. So we're pleased with the growth rate, especially 2009, 2010 and 2011, can you see a nice steady slope, increasing upward. For net income, here you'll see the net income by quarter and then the next slide by fiscal year. And once again, a very nice increasing slope and we have no reason to think that that trend will not continue.

Marketing and sales, we continue to do a significant number, very large number of conferences and scientific meetings. We have begun doing over the past 13 or 14 months training workshops which are a profit center of their own and serve both to I would say entrench our software into the minds of our users, the ones that we have done so far are advanced training workshops for our GastroPlus software. We've done three of those now, two in the US, one in Germany, and we have both industry and FDA attendees for those workshops and these are for people who already know how to use GastroPlus which is a very sophisticated program, but the advanced training is a full week and this provides additional instruction in how to solve some of the toughest problems that we've seen when we do the consulting work that we do, even with top five pharmaceutical companies.

I've mentioned this before, that a lot of our consulting work comes from customers who actually have the software and have people who have been running it for perhaps as many as 10 years, but still are not running it every day as we do. They may be running it every few weeks or maybe even spaced a little further than that. And so when you get a really tough problem, they will come to us and ask us to take a shot at it and so far, knock on wood, we've always been able to come up with plausible explanations based on the modeling and analysis that we do and the repeat business there is actually very satisfying because this is an area, again, where we do have a world class expertise and you can tell that we have a tremendous amount of respect out there in the industry for what we're able to do in our little market niche.

We've emphasized posters and presentations, also peer reviewed publications as one of the ways to get the word out about the science that we do. We're not just a software company. We are a science-based software company. We've initiated some strategic digital marketing initiatives. In addition to the html e-mails and the website, we now have some of the social media with a new person working with John. Arlene has done a very nice job of getting our name out there through some of the social media.

Collaborations and consultation and grants, I touched on that briefly with the consultations that we do. Last year we finished the SBIR grant that we had with the National Institutes of Health -- I'm sorry, earlier this year we finished that in the spring. And so those revenues actually would have been in fourth quarter of 2010. That was around $60,000, maybe almost $70,000, and those were not present in this past fourth quarter because the contract was done. So that amount of revenue had to be made up and then additional sales made to get that growth rate that we did have on the pharmaceutical side. So the growth in software and services is actually larger than the -- I think it was 7% that we saw for the fourth quarter, because part of that had to make up for this grant funding that we had in the previous year.

We are actually negotiating now a new funded collaboration with one of the top five pharmaceutical companies for further enhancement of our GastroPlus software product. I can't reveal the details about that, but we had a very lengthy meeting with a very large number of people from their side here the other day and definitely looks like it's going to go forward.

We have four active consulting projects right now and that seems to be the trend. As we finish one, another one or two come in and so it varies up and down but I'd say we're probably averaging around three to five on an ongoing basis virtually ever month right now. There is still, I think, a fundamental industry shift that is continuing to grow and that is that simulation and modeling software are productivity tools and the industry's recognizing that more slowly than we'd like but you can see the trend as I saw 30 years ago in the aerospace industry, almost 40 years ago now, the recognition on the part of management and the grass roots scientists is that these tools pay for themselves in many ways.

The AAPS meeting, that's the American Association of Pharmaceutical Scientists that was held in October in Washington, DC had 20 presentations or more than 20 presentations that referenced our software, several from the FDA, five of those were from our own scientists, the remainder were all from industry and FDA scientists. That far outweighed any other company that's doing what we do. Those were all related to the GastroPlus software. Of course, software tools continue to evolve. Any program once it's released is subject to the next release being worked on and that's the way it works in the industry. It seems that if you're not working on a program, it's probably dying. We're always working on all of our software to improve it and as we advance the technology and add new capabilities, you end up with new customers who are able to use those new capabilities. This happened with our ocular and pulmonary delivery systems or models that we added about a year ago.

We did have during fiscal year 2011 about 58 new customers and this includes both new companies and new departments within existing large customers. You got a company that's huge like a Pfizer, Roche, GSK, Johnson & Johnson and they're so big that they're often like a conglomeration of small companies and so selling to a new department or new geographic location is as much amount of work as it is to sell to a new small company of similar size that's a standalone company.

Enhancements to the software, as I said, we continue to work on all of the software programs. GastroPlus, our flagship product, produces more than half of our total revenues on the pharmaceutical side for software licenses and is the primary software tool used in our consulting services. We are working on version 8.0. We expect to release that in the next couple of weeks. This will be a major upgrade.

We expanded drug-drug interaction capability now so it is -- I would call it complete. We now have transporters as well as enzymes and we have induction as well as inhibition. So induction means that when you dose a drug, it causes an increase in the number of particular enzyme or transporter, which affects another drug. In the past, we had inhibition where a drug would cause a decrease or inhibit the activity of an enzyme, but now we have both transporters and enzymes with both induction and inhibition.

The pharmacodynamics modeling module has been expanded in a very nice way. We have got some capabilities we didn't have before and PD Plus again allows us to simulate and predict the effect on the body of the drug being in the body. In the past, we dealt a lot with pharmacokinetics, the effect of the body on the drug, what happens to the drug when it goes into the body, and we had a limited capability with the pharmacodynamics side. This has now been expanded very nicely in the PD Plus module. The ocular delivery module and the nasal pulmonary delivery model have both been expanded to include the full capability for transporters and enzymes involved in the eye and the lungs and in the nasal passages.

ADMET Predictor, our best-in-class property prediction program for molecular structure is undergoing another major upgrade and we expect version 6.0 to be released here in the next few weeks. We have now the ability to predict sites of metabolism on a molecule so when the chemist looks at a molecule and wants to know what particular enzymes are likely to attack that molecule and try to change it through an enzymatic reaction, where on that molecule is that likely to happen. Which atoms are the most likely to be attacked by particular enzymes and then with that, that goes along with the enzyme metabolism module and the metabolite module that we have had developed along with the (inaudible) database, metabolite database that we released earlier this year in version 5.5.

Our pKa models, this is a technical term but when molecules that tend to act like acids or bases get into the body, depending on where they go, they will eye ionize based on the local pH, how acidic the fluid is that they're in. If they're in the stomach, it's a very acidic environment. If they are in the intestine, it could be a more basic environment. So depending on the pH of the fluid around the molecule, it will ionize. pKa is an indication of how that ionization takes place. It's a critical model because many of the other models depend on that ionization model to get the correct predictions. So that's been improved.

We've retrained the models that we've had with our new atomic level of descriptors. We've added some more of those and this was part of our SBIR grant with the NIH, it's about a three-year grant where we developed the ability to calculate the atomic level of the descriptors very quickly. Previous methods would require perhaps as much as a whole day to calculate the descriptors for a single molecule and now we can calculate a couple hundred thousand per hour as part of the descriptor library that's available for us to build these predicted models.

MedChem Studio, we released version 2.0 in April. That was a major upgrade. We have new changes that are being worked on now and will be released in the near future. One of the big changes was that we integrated the new MedChem Designer software. This is a molecule sketching tool. There are a number of them out there in the industry, most of them are free and we made this one free. The difference in this one over the others is that there are some greater flexibilities in terms of the drawing, a little bit more accuracy in the depiction of the structures and, most importantly, the integration of MedChem Designer with ADMET Predictor. So this allows a chemist to sketch a molecule and copy it, make several copies and make small changes to the molecule and click on a little button for ADMET Predictor and predict all of the 130 plus properties that ADMET Predictor generates in a matter of seconds for each of these changed molecules.

This is a tremendous tool for a chemist because a chemist can now sit there and as a chemical designer modify a structure and see not only one or two properties that they're concerned about, but also see 130 other properties that might be a surprise. So chemist will look at a molecular structure and try to modify it to maybe make the molecule more soluble so that it can dissolve a larger amount of it in the given amount of fluid or to make it more permeable or make it more active for a target or less toxic for a toxic target, but it's hard to see all of that all at once. With this you can change the molecule, click on a button and you get the 130 properties but you don't have to scroll through all 130 to see if anything is out of bounds. You have a scoring system that we call ADMET Risk and in that one number you see a point [count] and every point it gets is something that violated a threshold that you set. So a designer sets the thresholds, the number comes up. If you see a three or four or five, you'll see a letter code that's right below it that tells you what each of those points represents. Maybe you can live with those points, maybe you can't, but instantly you're now seeing in 130 dimensions instead of just looking at one or two or three properties at a time.

So this med MedChem Designer is free as I said. We've had over 1600 downloads and activations now. That's a very nice entree. We do give away with the MedChem Designer a couple of the key properties from ADMET Predictor as a teaser. You get to see that there's -- if you don't buy ADMET Predictor, of course, that's all you get is those small handful of properties, but you'll also see that there's a whole lot more that you could get if you simply license the ADMET Predictor.

Metabolite structures, says prediction to be available soon. That's actually in the version now. That will be out very shortly. DDDPlus we released version 4.0 in June in the fourth quarter and we added some features here requested by various users, including the FDA. It's not a big revenue generator but it is a program that's growing in its user base. It's the only program like it. No one else has even attempted that we know of to try to build a program like this. It is a feather in our cap and the FDA added a significant number of additional licenses during the third quarter of FY11.

So just to summarize then for FY11, revenues up on a consolidated basis 9.4%. I think it was 14.7% for the pharmaceutical. Net income, up 25.9%. Earnings per share up 29.3% and cash up 5.7% as of August 31, and add another $2 million to that, $2.1 million to that, for the cash as of today with the sale of Words+.

We're continuing to expand our life sciences team. We've added a couple more during the past fiscal year. We want to continue to develop new products and services at an increased rate and also our life sciences team supports our marketing and sales to a large extent. In this industry, sales are scientific sales. You have to get out there, meet scientist to scientist and get out to the scientific meetings and so rather than having a large dedicated marketing and sales staff, we want our life sciences team who do the software development, who do the consulting studies, to get out there, build those relationships with the industry scientists and so far that seems to be a successful approach.

We are globally recognized as a leader in our respective market niches. We do have an outstanding reputation for scientific expertise and innovation and for strong customer support. We get a lot of compliments that someone calls or sends an e-mail, they get a response quickly. We use the Internet a lot for go to meeting-type sessions or WebEx sessions and so we're able to provide visual support for scientists around the world, just coordinating our different time zones.

Finally, the sale of Words+ is of course a major change in the company. It's going to strengthen Simulations Plus. We believe the additional cash and reduced liabilities of course strengthen the balance sheet but most importantly this allows us to focus our attention and our resources on the pharmaceutical software and services business.

So that's the end of the slides. They will be available on the website and now I'll be happy to take some questions. We have quite a list of questions here that have been typed in. I think we should charge by the question and Walter Ramsey would owe us a bunch. He's always got some good questions. I will just take the written questions first then.

Will the Company publish pro forma financials for fiscal 2011 without Words+? Yes. As I mentioned, we are required to put that into an 8-K within the next three working days. So as quickly as can put those together, we'll file that 8-K. Will the Company publish pro forma quarterlies for fiscal 2011 so we can see what the comparisons will be ahead of time? Momo, can you answer that?

This is a difficult question. The tax, I will say anywhere between 34% to --

No, that's not the question. It's the first one, well at least on my list the first one, I'm not sure what your screen looks like.

Net gain after tax.

The pro forma financials. Can you see the question from Walter Ramsey on pro forma financials?

I have the capital gain in Q1.

No. No. Let me read the question to you. It says will the Company publish pro forma financials for fiscal 2011 without Words+? The answer is yes, we will do that as of August 31. The second question under that is will the Company publish pro forma quarterlies for fiscal 2011 so we can see what the comparisons will be ahead of time? I'm not sure what they mean by ahead of time. It's in the past. I'm sorry?

Yes, it is required.

For each quarter of fiscal 2011?

Yes.

Okay. All right. So the answer is yes. Thank you. Who is your typical pharma customer? By that I mean are they entire organizations, departments within organizations, or individuals within departments of organizations and the answer is all of the above. Entire organizations sometimes, smaller companies would probably be a case where you would see an entire organization licensing. Departments within organizations or geographic locations within organizations, and occasionally individuals within departments. So just depends on the customer. Sometimes it's any one of those three.

The next one, what will the tax rate be in fiscal 2012 without Words+? Want to take a shot at that, Momo?

I would say 34% to 38%. That's the best of my guess.

I'm sorry, 34% to 38%?

Correct.

Okay. Next question. What will SLP do with the $2 million received from the sale of Words+? Well, the IRS is going to take a chunk of it. The legal fees, the accounting or auditing fees, the tax specialist fees, the severance pay for the Words+ employees, paying off the accrued vacation and other things like that is going to consume a pretty good chunk of it, I'd say ballparkish somewhere maybe around $700,000 or $800,000. That's a guess. Momo might have a better idea. That's still going to leave us with maybe 1.3 or somewhere in there after paying for all of those expenses. Those will be one time charges, of course, that should fall all in the first quarter. One of the reasons we tried very hard to close this as of November 30 and were successful in doing that is that we wanted this to be a single quarter impact rather than dragging on into the second quarter and we were able to do that.

What were the transaction related costs in Q4? In the November quarter just ended. Q4 I don't know the exact number. The quarter just ended, again, we don't have all those numbers added up but it's going to be substantial because of both the attempted acquisition of [Entelos], which involved quite a bit of legal work and some travel and other due diligence efforts, and then of course all of the work going towards the sale of Words+. Those numbers I don't have off the top of my head. Do you have any estimates for those, Momo?

No, I have not received the legal bill yet.

Okay. We know it's there and it's accrued in the first quarter but we don't have the exact number.

What's the renewal rate for pharmaceutical software? John, can you take that one?

Yes. In the fourth quarter it was approximately 94%, and then for the fiscal year we were sitting at 93%.

Excellent. Thank you.

What percentage of pharmaceutical software revenues were generated by existing customers? Can you handle that one, John?

I can. In the fiscal -- in the fourth quarter, it was approximately 68% coming from existing customers and then for the 2011 fiscal year, somewhere on the order of 71%.

Great.

What do you expect the profit margin to be going forward? Well, I expect it to be higher. Without the Words+ business, the profit margin is significantly higher with just the pharmaceutical side. I'm going to guess, and it's a guess, on the order of high 70s to low 80%, should be I think a reasonable guess for that.

The Company only issued 20,000 stock options in fiscal 2011. Will that rate continue? Well, that's up to the Board of Directors. The Board determines when stock options can be granted and how many. We haven't had a recent discussion on that so I really don't have a good way to answer that. I think we're overdue for issuing some options. I know we have some newer employees that I don't think have any options yet and I don't think that's good. I think every employee needs to be incentivized with stock options. So we'll be taking a look at that in the coming weeks and months.

Next question, regarding the sale of Words+, was there a capital gain in Q1? What was the net gain after taxes? That's not public information yet. Will that be in the 8-K, Momo?

Yes.

It will. Okay. So watch for the 8-K. Should be out in the next three working days and have the details there.

Next question. Please explain more in detail the malaria work. Okay. Our three chemistry tools, MedChem Studio, MedChem Designer and ADMET Predictor combined are a tremendously powerful suite of software for designing new molecules. We've done a number of posters and presentations showing examples of molecules that we've designed to hit a particular target. We did one for HIV, we did one for -- starts with an M -- muscarinic receptor and there was a third one. I'm blanking on the target there. It's one thing to do a paper study. It looks good, but the proof is in the pudding. If you really believe that your tools work, you don't just make drawings of molecules, you make the real molecules. So what we've done here is we chose a target here for malaria because it's an orphan drug, first, and because the Gates Foundation, Bill and Melinda Gates Foundation funds research in malaria as well as many other areas. We thought this could be a really good way to show what we can do with our software tools to design some good lead compounds and I have to explain.

Lead compounds are a set of molecules that are a good starting point for further development. The odds of designing the final molecule in a matter of a couple of months using software tools or any other method for that matter, that the final molecule is going to be an approved drug in that short of time are just tremendously against you but the main thing we want to show is that you can get good leads much faster and much cheaper by using tools like this. And the way to prove it is you design some molecules, you get a chemistry company to actually make those molecules and these molecules that we've designed are being made now, and then you test those molecules. We're not going to do as extensive testing as a company would do for a full blown drug development, but we're going to make enough measurements of the properties that we predicted these molecules would have to show whether or not we were anywhere close and we're not going to hit them all perfectly.

That's not possible, but if we get even one molecule out of half a dozen to a dozen molecules that we synthesize, if we get even one that hits the malaria target and has decent properties for the other things that we measure and we're not going to measure everything, but at least for the ones that we do measure, then we've shown that in a very short period of time at very little expense we were able to get to molecules that provide a good starting point for going after malaria and so it's a proof of concept that's not really designed to be a drug development program. It's a proof of concept for the software tools. If we get lucky and the molecules are really good, we could license the molecules to a larger company and say here you go, you take it from here and we'll take a little percentage some day if and when it becomes a drug, but the real goal here is proof of concept.

Next question. Of the several products and services offered which do you see as the most significant growth engines? Any new products or services expected in the new year? Well, I believe all of our products, the chemistry side, MedChem Studio, MedChem Designer and ADMET Predictor, and the simulation side, GastroPlus and DDDPlus are both significant growth engines.

GastroPlus so far remains the largest revenue generator but I think the more competitive environment of chemistry with MedChem Studio, MedChem Designer and ADMET Predictor is an area where we can do quite a bit of growth and the malaria project is one of the things, just one, but one of the key things that we believe is going to get people to stand up and take notice that, hey, not only do we get top ranking when anyone compares ADMET Predictor's property predictions with other prediction programs, but also when you combine it with MedChem Studio and MedChem Designer, we've got a truly knock your socks off molecule design capability that doesn't exist anywhere else because you really need two things. You need the way to generate the new structures, which studio and designer can do, but then you need to know if they're any good and that means you've got to have a good prediction tool and we've got the best in the world in ADMET Predictor. So I see chemistry side as a side with very significant growth potential and I don't see GastroPlus slowing down. It is top rated in its market niche as well.

Next question. I understand why gross margins would improve given Words+ gross margins were below corporate average, but how much of corporate support costs were allocated to Words+ and while some of that will disappear will there be incremental corporate support costs beyond what has historically been allocated to pharma that will impact operating margins? The one thing that I did mention was the lease. As the floor space that Words+ needs is gradually reduced, then that floor space will have to be paid for from the pharmaceutical side, but also as I mentioned, we need more floor space.

We've been actually putting people into rooms that were not designed originally to be a regular office but more as just a small working room with some computers in it. So we hope to give people a little bit more breathing room here once those extra offices become available after the first of the year. The other incremental cost that I can think of are all negative. They're all going down, in other words, and that's things like insurance and other things that are based on perhaps head counts or total revenues, that sort of thing.

Next question. Do you expect some kind of licensing revenue prospect from the malaria project? Expect? No. I would say to expect it is being far too optimistic. As I said, our real goal here is to put in $50,000 or $100,000 to invest in demonstration of the concept of software development of lead compounds very quickly and very inexpensively. And, again, if we get even one molecule out of a half dozen or more that we're synthesizing that looks good, that will be quite an accomplishment. If we get four out of six or something like that, that would be phenomenal, but truly to license it, I'd say that's a little bit serendipitous. Anything can happen, but I certainly wouldn't say we expect it.

Next question. Can you talk about the philosophy of exiting manufacturing to focus on services and with the increasing cash balance, what is the current thinking regarding expanding the services business? I suppose Entelos would be an example. Could you provide some additional color behind the rational there? The manufacturing business and the augmented communication business is very competitive, a very difficult business for various reasons that I've already talked about, Medicare, Medicaid insurance and all of that sort of stuff. The services business, the consulting business has been growing steadily. Entelos would have been or Telos I should say, I always say that wrong -- Entelos would have been a consulting business, probably more so than a software licensing business, although they were some software licensing capabilities there as well. We believe that there's a need for both sides of that business.

The consulting services reinforce the sales of the software. Very often we'll do consulting with a new customer first and then when they see the power of the software and the cost of consulting, because it's not cheap, they decide hey, maybe we should just assign someone to do this in-house and license the software. Other times they say we're just not going to use this often enough to license the software so even though it's expensive to pay for consulting, we don't need it that often so we'll just pay for the consulting. I think we really have to have both. People move around in the industry. You may consult with a small company a few times and then one of those scientists will go to a larger company who could afford to license the software and introduce it to them as someone who's familiar with the concept. Let's see.

Next question. Any idea of a dollar amount of costs that will be saved from selling Words+? Oh, gosh. I don't think we have a handle on that just yet. We know categories and we know ballpark ideas, but I don't think we have a number that would be a solid number. Do you have any estimate of that, Momo?

No. For fiscal year 2011, Words+ had the gross margin of $1.6 million, and we had about SG&A and R&D expense was about little over $1.5 million. Now, gross margins going to go away and $1.5 million in SG&A is going to go away except the large amount I can think of is the office lease. That will be totally Simulations Plus' responsibility, although there is a potential sublease that probably we will [fill in] pretty soon. So in dollar amount wise, for the cost expense is probably $1 million is going to go away. But, again, gross margin's going to go away too.

I would say if you look at the building lease, I think we've been splitting the total lease of around $26,000 a month, so about $13,000 for each company, somewhere in that neighborhood. So if Words+ were to move out completely, then the $13,000 that they were paying would be paid by Simulations Plus. So let's say for round numbers, 10 months out of next year we had to pay for all of that, that would be $130,000 for the year and that would be offset by a number of the other costs that I mentioned, auditing, legal, all the internal controls costs and things like that. So it's hard to say just yet how it's going to work out. I think we need to get another couple of quarters under our belt and see how it looks at that point. But we certainly are optimistic that profit margins are going to be significantly higher and that our ability to focus on the pharmaceutical side of the business is going to pay off.

That's the last question that I see printed here. I see Steve Shaw has his hand up. Let's see if I can -- Steve, you should be live. Go ahead, Steve. Steve Shaw? Okay. Maybe not. Steve, we're not hearing you. I've turned your microphone on, according to my panel. If you do have a question in addition to the ones that you typed in, just go ahead and type in another one because we're not hearing you on the voice.

Walt, there are four more questions left.

Well, I'm not seeing them, why am I not seeing them?

Maybe expand the questions window.

It's expanded as far as it goes. They must have come in and inserted themselves in my list. Let's see. 2.18 p.m., the last one I show is 2.18 p.m. I do see one that got inserted here, 2.08, why was malaria chosen for the new design synthesis. That, again, one, it's an orphan kind of drug in a way that there is a need, a vast need in the world. The number of deaths of malaria, especially children, is enormous, it's in the millions and there is a need for very low cost therapeutic agent.

GlaxoSmithKline was good enough to put a database of molecules on the Internet, publicly available, that we could use as a starting point so that we had the ability to build using ADMET Predictor, we could build an activity model that would allow us to predict activity against the malaria target a certain way and that then allowed us to predict the activity for any new molecules that we designed.

There's a couple of things. The need in malaria for a low cost therapeutic agent. The database that was available to allow us to build an activity model because we have to have activity against a target as well as all the things that ADMET Predictor can normally predict and activity is something that requires measurement of a significant number of molecules against the target so that you can build your predicted models and then the third, again, the Bill and Melinda Gates Foundation funds research in this area.

So one of the payoffs, one of the questions here and I probably should have answered this question, do you expect some kind of licensing revenue prospect for malaria project? Perhaps not licensing revenue right away, but one thing that could be done is that if we're successful we go to the Bill and Melinda Gates Foundation and say look, look what we've done in a very short period of time with a very small investment and we have some very promising lead compounds, imagine what we could do if we put much more significant investment into this and would you like to fund it. And they do fund malaria research in the millions of dollars. So there's a potential there, perhaps. Those were the reasons for going after malaria.

I see one that I missed. Will you resume stock repurchases? I believe we will. It's up to the Board. We will be having a Board meeting here in the coming weeks and the Board will decide if and when and how much we'll repurchase, but I think the use of proceeds from the Words+ sale, I think stock repurchases are certainly very logical one. Perhaps even a dividend of some sort but, again, that's up to the Board of Directors. And let's see if I can see another question that hasn't been answered.

I think 2.18 from Walter Ramsey.

2.18. Capitalized software development costs were $911,000 last year. How much of that related to Words+? Momo, you're going to have to answer that one. I can't.

Yes. I'm looking at it. $220,000 belongs to Words+.

Okay. So that is now gone. And we will not be amortizing that anymore. So that again is a savings. I saw another question, scroll up here. Where was it? The way they organize these questions is a little bit -- what other areas or projects are you collaborating with GSK on? If we were, we're under a non-disclose sure, we wouldn't be able to talk about it. At the moment I'm afraid I can't answer that question.

2.17 from Donald (inaudible).

Thank you. Is there any role that support vector machines and [fractal geonomic] modeling can play in SOP software? Well, supported vector machines are one of a number of mathematical methods for building predictive models and we have tested them. It is available within ADMET Predictor, but in general we find that they tend to I would call it over-training the data.

So they learn the data that you're providing, but when you try to predict outside of that, at least in our experience, it has not been as effective as the artificial neuro network ensembles that we use. Modeling we have not dealt with that that I know of. I don't think I've even seen the term before so I'm afraid I can't answer that one. Let's see. Are there any others I missed, John?

I think one more. Walter Ramsey at 2.14.

2.14. Is a 93% renewal rate a realistic target for fiscal 2012? Is it realistic to expect 30% of sales to come from new customers in fiscal 2012? If so, that suggests sales growth of 20% to 25% plus whatever new collaboration the Company gets. Is that fair? That's a pretty loaded judgment call but I'll ask John to take it on if you feel comfortable in talking about that. John.

I would certainly say that a 90% plus renewal rate is realistic without question. The number that I had quoted earlier about the percentage of revenue coming from existing customers, that 71% figure, that was for software licenses and Walter's question, the 30% remaining would actually be split up between new license sales and also the consulting collaboration revenue. So in last fiscal year 2011, the new license revenue was approximately 20% to 22% of the overall sales and I would expect that to be about the same for fiscal year 2012 but I'm not going to make any suggestions about sales growth for fiscal year 2012. I'll pass it back to Walt.

Thank you. And I think we've got them all now.

I don't have any left.

I don't see anyone with their hand up on the attendee list and I think we've answered all the questions. All right. Well, it's been exactly an hour so that's about right. We thank you all for attending and the slides will be -- and the recording will be posted on the website as soon as we can get all of that arranged and hope everyone has a great holiday season and a nice new year and we look forward to talking to you again next year. This concludes the presentation.