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Accelrys Posts First Profitable Fiscal Year, Plans Reorg to Drive Long-Term Growth

Fresh from closing its first profitable fiscal year ever, Accelrys plans to reorganize its R&D and sales teams in order to capitalize on the double-digit growth it is seeing in its “scientific operating platform” products built upon the SciTegic Pipeline Pilot workflow software, company officials said this week.
As part of the reorganization, the company plans to lay off around 30 employees in its marketing, services, and R&D organizations in order to “invest more heavily in the growing platform product line,” CFO Rick Russo said during the company’s fourth-quarter earnings call this week.
Those 30 staffers will be replaced “with new employees with specific skill sets needed to drive platform business in the years ahead,” Russo said, leaving the company’s headcount stable at around 379 employees worldwide.
The realignment, slated to take place during the current quarter, will cost Accelrys $800,000 in the current quarter in severance payments, Russo said.
Russo said that the company is planning a rebranding campaign to raise its profile as a provider of “scientific business intelligence” solutions — a term that it has been using with increasing frequency over the last year to describe its business [BioInform 05-09-08].  
“We will be increasing our investment in marketing to support our expansion into the SBI marketplace by embarking on a rebranding of Accelrys and the strengthening of our business development, alliance, and product marketing organizations,” Russo said. He did not provide a timeline or other particulars of the rebranding effort.
On the Brink of a Turnaround
Accelrys disclosed its reorganization plans as it reported its first-ever profitable year on a GAAP basis. For its 2008 fiscal year, which ended March 31, the company reported a profit of $1.3 million compared to a net loss of $1.5 million for its 2007 fiscal year.
But CEO Mark Emkjer warned investors during the conference call that the firm’s plans to invest more aggressively in R&D and marketing for its scientific operating platform would likely constrain future profitability.
“We believe it is in our shareholders’ best mid-term interest to step up our investment in the scientific business intelligence vision in anticipation of expanded growth opportunities,” he said. “We believe that we are creating the market for scientific business intelligence. It is critical, then, that we make headway early and build a solid foundation from which to grow.”
As a result, he said, “it is possible the net effect may be a short-term dampening on profits.”

“We believe that we are creating the market for scientific business intelligence. It is critical, then, that we make headway early and build a solid foundation from which to grow.”

Nevertheless, the company is optimistic about its future performance. For the first time since joining the company in late 2002, Emkjer provided analysts with financial guidance during this week’s call, predicting that the company will see “mid to high single-digit growth” in organic order intake during fiscal 2009.
Emkjer said he also expects the company to be cash-flow positive from an operating perspective and reach non-GAAP operating profitability for the year.
The optimism is largely due to the 40-percent growth in orders that the company saw for its scientific operating system during the year — a trend that it expects will continue through fiscal 2009 and beyond.
For the year, revenues slipped 2 percent to $79.7 million from $81 million in the prior year, but officials noted that the decline was expected as a result of lower orders for its “sunsetted” legacy products. Indeed, Accelrys has reported a fall-off in revenues for these products for six consecutive quarters. The decline has been partially offset by strong performance in the firm’s Pipeline Pilot product line, though not enough to make up the difference.
Accelrys officials said they believe that this trend is nearing its end. Russo noted that the company’s sunsetted products comprised $11 million of total revenues in the company’s 2006 fiscal year, $8 million in FY 2007, and around $5 million of FY 2008 revenues. He said the firm estimates another $3 million decrease in FY 2009 “as the phase-out of these products continues.”     
Sales for the scientific operating platform, however, are exhibiting the opposite trajectory. This product line represented around $16 million of customer contracts in the company’s 2007 fiscal year, and grew to more than $22 million in FY 2008. Based on the company’s projections of continued 40-percent growth, this part of its business will generate nearly $31 million in customer contracts in FY 2009.
“Given that platform products are an increasingly larger portion of our overall revenue, we now believe that in each of the quarters ahead that the continuing growth in the platform products, which we expect to be similar this year, will exceed the phase-out in our sunset products, resulting in an overall increase in order intake over the prior-year period, which should result in an increase in our revenue run rate,” Russo said.
Accelrys is seeing some initial evidence that this is indeed the case. For the quarter ended March 31, total revenue rose to $20.4 million from $19.9 million for the same quarter of the previous year.
The company narrowed its net loss for the quarter to $500,000 from $1.1 million for the comparable period of 2007.
Fourth-quarter product-development costs rose 12 percent to $4.7 million from $4.2 million in the fourth fiscal quarter of 2007. Sales and marketing expenses also increased for the quarter, rising 6 percent to $8.7 million from $8.2 million in the prior-year period. General and administrative costs fell by 12 percent, however, to $3.7 million from $4.2 million in the fourth quarter of the company’s 2007 fiscal year. 
Full-year product-development costs fell 6 percent to $17.8 million from $18.9 million, while sales and marketing spending rose 7 percent to $33 million from $30.7 million. The company reduced its general and administrative expenses 16 percent to $14.5 million from $17.3 million.
As of March 31, Accelrys had total cash, cash equivalents, restricted cash and marketable securities of $76.4 million.
‘No End in Sight’
Emkjer said he sees “no end in sight” for the growth potential of the scientific operating platform. He said that the technology is currently used by “19 of the top 20 worldwide pharmaceutical companies,” but noted that “the majority of the platform activity today in pharma is actually concentrated in early discovery.”
Emkjer said Accelrys is currently developing “numerous solutions … that can stretch across the continuum of discovery, development, and manufacturing,” which offers an opportunity for the firm to extend its presence downstream within the biopharmaceutical market.
In addition, he said that Accelrys plans to expand the reach of the platform beyond the life sciences into four key vertical markets: industrial chemicals, aerospace, consumer packaged goods, and oil and gas.
“We believe these industries have the same unmet needs as the biopharmaceutical space in terms of inhaling data, applying advanced analytics, and then reporting” the results, Emkjer said. “Therefore, we are increasing our investment in the sales, marketing, and platform R&D to further exploit these opportunities.”
Emkjer said that some of the 30 new hires the company plans to make in the current quarter will be in line with that expansion into new markets.
“We’re beginning to hire industry experts that have a Rolodex, who know people within [these industries], and who really understand the customer needs that are specific to those vertical markets so that we can begin to penetrate that market [and] exploit that marketplace,” he said. 
He added that the company expects to see “traction” in these new industries with its scientific operating platform in the second half of its current fiscal year.

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