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Accelrys Posts 3-Percent Rise in Q3 Revenue; Eyes 'Right M&A Opportunities'

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Accelrys this week reported that third-quarter revenues rose 5 percent as a loss in the prior-year quarter swung to a profit, and a senior official said the company continues to eye "the right M&A opportunities."

Interim CEO Todd Johnson told investors during the firm's earnings conference call this week that he is "pleased" with the company's "rock-solid financials," and said the firm expects to add to its headcount during the year.

However, one of Accelrys' largest shareholders took the company's management to task during the call, expressing concern about the firm's stock price, which has been trading in the single digits since mid-2004 and is currently hovering around the $4 mark, 37 percent below the same period last year.

Michael Kaufman of MAK Capital, Accelrys' largest direct shareholder with 9 percent of the company's stock, castigated the firm's board for not buying shares, questioned Johnson's familiarity with the business, and suggested that the firm consider putting itself up for sale.

In response, Accelrys CFO Rick Russo told Kaufman, "We can't control the stock price of the company."

Johnson, who took the reins at Accelrys this month after the company's previous CEO Mark Emkjer resigned, acknowledged during the call that the company "began seeing the impact of the global recession" during the quarter, and that "some of our customers delayed and/or cancelled orders, particularly in the month of December."

"Our life science products were most heavily impacted by these cancellations and delays as some of our customers laid off many employees including entire user groups and/or consolidated sites," he said.

As a result, he said, orders in the third quarter for the company's modeling and simulation products decreased year over year, though sales of its Pipeline Pilot platform "continued to grow at a healthy double-digit pace," resulting in overall orders being "essentially flat" year over year.

For the three months ended Dec. 31, 2008, revenues increased by 5 percent to $20.6 million from $19.6 million in the prior-year period.

Product-development costs plummeted 24 percent to $3.4 million from $4.5 million, sales and marketing costs dropped 8 percent to $8.8 million from $9.6 million, and general sales costs dropped 6 percent to $3.2 million from $3.4 million.

The company posted net income of $1 million, or $.04 per share, compared to a net loss of $1.2 million, or $.05 per share, for the same quarter in 2008.

As of Dec. 31, 2008, the company held $72.5 million cash and marketable securities.

'Cash is King'

Noting that "cash is king" for the firm, Russo said that Accelrys is "sitting on it because we're looking at the right M&A opportunities. … There are opportunities out there that are good values for us." He did not elaborate.

Johnson added that any acquisition opportunities would not be put on hold pending the appointment of a permanent CEO.

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"We have not put that limitation on the company, and we continue to evaluate M&A opportunities," he said. "I have done M&A in my career and I think the board has every confidence that if we find the right kind of opportunity, we will move ahead prior to a permanent CEO."

Asked about a timeline for finding a permanent replacement for Emkjer, Russo said the process "normally takes four to six months," but noted that "the most important thing is we're going to take as long as it takes to get the right person, and we have an interim guy [in whom] we are very confident. So we will not panic if it takes a little longer."

Chairman Kenneth Coleman noted during the call that Emkjer and the board "together reached the conclusion that it was time for a change in leadership" for the company.

He said that the board has asked Johnson to "concentrate on a more rapid execution" of the company's strategy, and to specifically focus on the firm's "go-to-market initiatives."

Coleman added that Emkjer had done "a tremendous job in turning the company around" in his four years at the helm, and said the next phase should be with a CEO who will create "long-term sustainable growth."

Johnson served in executive marketing and sales positions at Hewlett Packard and Silicon Graphics and was most recently CEO of Kontiki, a managed peer-to-peer technology firm that was acquired by VeriSign in 2006.

He said his plan at Accelrys is to "maintain the company's momentum" during this transition period.

Johnson declined to offer details on customer renewal rates recorded since the financial downturn, but said that there was a "direct connection" between the recent spate of layoffs in pharma and biotech and the drop-off in sales of the company's modeling and simulation tools.

"We had cases where it looked like budgets had been secured all the way right up until the very end of the quarter and orders just weren't executed," he said. "You'd get through four levels of signature and at the fifth level of signature it would get pushed into the following quarter."

Johnson said that despite the impact on its modeling software, the company's Pipeline Pilot platform has an "advantage" in this climate: As companies seek to drive up productivity and "get more work done with fewer people," the platform "fits well within that agenda," he said.

Russo said that sales of Pipeline Pilot grew over 40 percent in the past year and that the company expects orders to grow approximately 35 percent in 2009.

'Flat-to-Growth'

Russo said that Accelrys will move from "flat to growth mode" in 2009, with orders expected to grow in the "low to mid-single digit percentage rate."

Johnson added that the company plans to continue "accelerating the execution of the growth strategy" by increasing the number of large customers that use Pipeline Pilot.

Acclerys also expects to add to its headcount during the year. "We would be expecting to be adding some headcount related to growing the [Pipeline Pilot] platform in the fourth quarter," Russo said.

Johnson added that there will be "very, very limited headcount growth to give us enough horsepower to execute on programs" that are already underway.

As of Dec. 31, 2008, the company employed 361 staffers, down from 377 from a year earlier.

Johnson said that in 2009 Accelrys will continue to target "new verticals," such as the consumer-packaged goods, chemicals, and energy industries, and will also continue to pursue its OEM partnership strategy in an effort to increase its customer base.

Another strategy, he said, will be to "use the expertise of large-system integrators by developing and marketing joint solutions to [their] large-customer base." He said Accelrys has been in "such discussions," and that he will shed light on them in the "near future." He did not elaborate.

'Lip Service'

MAK Capital's Kaufman accused Accelrys' management of paying "lip service" to shareholders during the call and castigated officials for not buying Accelrys stock.

Noting that publicly traded firms are to be run for their shareholders, he said that "as your largest shareholder I can tell you I don't feel that is what is going on right now."

Kaufman said that according to his records the company's board members have bought no stock in recent years and there is no stock buy-back plan in place.

"I'm sure there are some wonderful acquisitions out there, but you've got to ask, at what price does your own stock become a somewhat interesting acquisition in itself?" he said. "If you had your money at risk here, you would probably be a little more concerned that the stock trades at such a small premium to the cash on the balance sheet."

He added that he was "shocked" to hear that Johnson would consider M&A opportunities for Accelrys when he hasn't "been in the seat of the existing company for more than a few days."

Kaufman questioned the company's acquisition strategy. "If you're going to buy another business, you are going to have to explain to me … why that other business is so much cheaper than your existing business, and, for your existing business, if this is fair value, why not just sell it? I mean put it out of its misery."

Adam Hutt of Hill Partners agreed with Kaufman's comments, noting that "it would be nice to see some insider buying of substance."

Russo told the shareholders that the company will "continue to evaluate" its options.

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