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Accelrys Posts Flat Revenues for Fiscal Q1; Restructuring Costs Hit Bottom Line

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Accelrys this week said revenue for its fiscal 2009 first-quarter inched up 1 percent to $20.3 million from $20.1 million, but company officials voiced optimism for the remainder of the year and noted that orders for its Pipeline Pilot workflow platform are on the rise, and several multi-million-dollar deals are on the horizon.
 
In a conference call with analysts to discuss the company’s financial results, Accelrys CEO and president Mark Emkjer said that the company is “experiencing a significant increase in the number of large dollar solution opportunities involving both software and services in our sales pipeline.”
 
He said that these opportunities have been typically centered on the firm’s “scientific operating platform,” which is based on the Pipeline Pilot technology. 
 
In the past, Accelrys has had “a couple” of million-dollar orders in the pharmaceutical and life-sciences space, Emkjer said. He added that similar opportunities are also arising in new vertical markets for the firm, such as energy, chemicals, and consumer packaged goods.
 
He said that he believes “several of these large opportunities will turn into orders and subsequently revenue,” but did not elaborate.
 
In the meantime, the company is pursuing a restructuring plan that it announced in May in which it has laid off around 30 employees in its marketing, services, and R&D workforce with the goal of replacing them with new staffers who will be focused on the scientific operating platform.
 
Costs associated with this restructuring, including a charge of $842,000 connected to the severance of the 30 employees, caused net income during the quarter to plunge 94 percent to $86,000 from $1.4 million in the comparable period of 2007.
 
Lower interest rates and “unfavorable currency fluctuations” also took a bite out of profits in the quarter, as did increased marketing expenses associated with recruiting and relocating new employees, the company said.
 
Sales and marketing costs increased nearly 8 percent, to $8.1 million from $7.5 million in the year-ago quarter. Research and development expenses, meantime, were flat year over year at $4.3 million, while general and administrative costs decreased to $3.5 million from $3.9 million.
 
Russo said that the company has not yet added all of the employees back that it had been planning to replace, but expects during the current quarter to hire new employees with “specific skill sets needed to drive the platform business in the years ahead.” As of June 30, Accelrys had 353 employees, down 16 from the same time in 2007.
 

“What differentiates us is the combination of our platform with advanced analytics.”

Emkjer added that Accelrys has recently added “key roles” in sales, professional services, and marketing. Most notable, he said, has been the addition of Ilene Vogt as senior vice president of worldwide sales and services. Vogt was previously vice president of worldwide operations at Actuate, a business intelligence software provider, where she was “instrumental” in building that company’s sales force, Emkjer said.
 
Vogt’s background at Actuate is in line with Accelrys’ recent strategy to position itself as a provider of “scientific business intelligence” software. Company officials this week said that the firm is continuing a previously disclosed “rebranding” initiative around its scientific business intelligence business, but did not provide further details.
 
In May, Russo said that the rebranding campaign is intended to raise the company’s profile as a provider of scientific business intelligence solutions. “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,” he said at the time.
 
This week, Russo said that marketing efforts are underway to support “expansion into the SBI marketplace,” re-branding Accelrys, and other activities. “We believe these investments are strategic in our ability to secure growth and establish the market in 2009 and lay the framework for accelerated growth going forward,” he said.
 
Platform Growth
 
Russo noted that for the third consecutive quarter the firm had higher orders than in the prior year, including “significant growth” in its scientific operating platform and materials science products.
 
The scientific operating platform remains “the backbone” of the company’s scientific business intelligence strategy, Russo said, reiterating previous projections of 40-percent growth for that product line in future quarters.
 
Russo said Accelrys believes the platform orders will continue to grow at this clip and that this growth will eventually exceed the phase-out of the company’s sunsetted legacy products.
 
Repeating earlier estimates, Russo said that revenues from the firm’s sunsetted products declined from $11 million in fiscal year 2006, to $8 million in fiscal 2007, to about $5 million in 2008. He forecast a $3 million decrease in fiscal year 2009 as the company continues to phase out these products.
 
Fifteen months from now, he said, “we won’t have any more revenue from those sunset products.”
 
He also reiterated Accelrys’ previous forecast that order growth will be “in mid- to high-single digits” in fiscal 2009. He said this estimate reflects expected significant growth of the scientific platform, a flattening of the company’s modeling and simulation products, and the decline in sunsetted products. Revenue, which the company recognizes on a ratable basis over the course of the year, will grow at approximately half of that percentage increase, he said.
 
Going forward, Russo noted that the larger deals that Accelrys is currently negotiating will likely have a large service component, but he was hesitant to forecast the impact of those service agreements on the company’s financial results.
 
In response to an analyst’s question about service revenues, Russo said “we are just feeling our way with the size of the service component of some of these larger deals.”
 
In terms of longer term guidance, he said, “if we are high single digits in 2009, I think it would be fair to make the jump and say you can do better than that in 2010.”
 
Accelrys completed the quarter with $74.9 million in cash and marketable securities.
 
It’s in the Plumbing
 
Emkjer noted in the call that as the company markets its platform to a variety of industries, he is finding a similar environment as in the life sciences, in which R&D scientists are struggling with massive data growth.
 
“We are finding seemingly unending needs,” Emkjer said, in which customers are trying to use and analyze data from disparate sources, apply high-end analytics, report, and provide visual interactivity with the data. “What differentiates us is the combination of our platform with advanced analytics,” he said.
 
Emkjer said he does not anticipate that the current economically challenging climate will have an impact on Accelrys’ business because the company’s products “improve productivity, reduce cost,” and aid decision making.
 
“In many respects we can withstand more of a downturn than most companies, perhaps fly in the face of it,” he said.
 
Emkjer said that the company should gain long-term stability from its relationships with customers like Pfizer, Merck, Abbott, and Sanofi Aventis, which are embedding the platform across their drug-discovery, development, clinical, and manufacturing operations.
 
As opposed to the company’s traditional model, in which it primarily sold point solutions for modeling and simulation, he said that the platform “is going to be more of an embedded plumbing, so to speak, that people are not going to want to just sign one-year agreements on.”
 
Because the platform is used in the day-to day processes of a company, automating workflows and driving operating processes, customers are “more than likely going to want to sign longer-term agreements,” he said.
 
Emkjer also said that the current numbers show that Accelrys is “making significant progress” in transforming its sales force from selling point applications in modeling and simulation to selling solutions that span a given customer’s entire organization.
 
“This transformation will continue and I remain optimistic about future results,” he said.

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