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Putting Financial House in Order, Accelrys Targets Downstream Development Market for Future Growth

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Accelrys has filed a sheaf of records with the US Securities and Exchange Commission that should end a period of uncertainty for the firm in the wake of its December disclosure that it would have to restate its financial records for the past five years [BioInform 12-26-05].

Besides its historical restatement — which uncovered "weaknesses" in its accounting process — Accelrys this week filed its quarterly report for the three months ended Dec. 31, 2005, and its annual report for its fiscal year ended March 31, 2006.

The filings not only bring the company up to date with the SEC, but they may ensure Accelrys' continued listing on the Nasdaq exchange, which had warned the company in February that it faced delisting because it had failed to file its financial reports on time [BioInform 02-24-2006].

Accelrys said in a statement this week that it "expects to receive notification that it is compliant with Nasdaq's listing requirements."

In a conference call with analysts, Accelrys CEO Mark Emkjer emphasized the company's forward-looking strategy rather than its recent accounting history. "With the restatement behind us, we have positioned ourselves to continue improving our financial trajectory in the year ahead," he said.

The company is entering "a renaissance period," in which it intends "to move from a company primarily focused on early-stage discovery to a company focused on providing solutions to the entire continuum of discovery and development," Emkjer said.


Accelrys intends "to move from a company primarily focused on early-stage discovery to a company focused on providing solutions to the entire continuum of discovery and development."

Customer spending in downstream development "is significantly larger than in discovery activities," he noted, providing an opportunity for Accelrys to broaden its reach within its current customer base in order to drive top-line growth.

Emkjer said that Accelrys is building on the Pipeline Pilot workflow software it picked up in its 2004 acquisition of SciTegic in order to add "broader horizontal capability" to its platform. He said that the company has "ongoing efforts" in areas like reporting, text analytics, and image analysis, as well as "a number of initiatives underway related to clinical informatics" that it expects to be of interest to the drug-development market.

Emkjer did not provide additional details of these plans in the call, noting that the company is still in the early stages of the effort and that he didn't want to disclose too much for "competitive reasons." A company spokesperson was unable to provide further information before press time.

Emkjer said that while Accelrys is "keen on moving downstream" where there is "significantly more revenue upside," it still intends to "protect" its core customer base in discovery.

The company plans to follow the recent launch of Discovery Studio 1.5 — a release that Emkjer described as "the single largest development undertaking in the history of our company" — with version 1.6 in June and 1.7 in December.

Emkjer said that the company currently has "two out of four major products componentized and inside Discovery Studio," and that it expects to add include its remaining products in the platform by the end of 2007.

Accelrys said previously that Discovery Studio would include its Catalyst, Cerius2, Insight II, and Quanta modeling and simulation packages, but it was not immediately clear which of these legacy products have yet to be added to the platform.

Annual Revenues Grow 4 Percent, Net Loss Reduced by Half

For the year ended March 31, 2006, Accelrys revenues increased 4 percent to $82 million from $79 million in the year ended March 31, 2004. The company attributed the increase — its first since 2002 (see chart) — to organic growth in its platform offerings, as well as to the first full year of revenues from its SciTegic subsidiary, which was acquired in September 2004 and therefore contributed to only six months' worth of fiscal 2005 revenues.


click for larger view

However, Accelrys said that these increases were "partially offset" by continued declines in some of its traditional modeling and simulation products.

Deferred revenues, which Accelrys uses to compare orders year over year, rose more than 4 percent to $61.3 million from $58.6 million in 2005.

Accelrys reduced its annual net loss by more than 50 percent to $7.7 million from $16.6 million in the year ended March 31, 2005.

Annual R&D spending fell to $21.7 million from $22.7 million in the prior year, while the company's total operating costs declined to $90.7 million from $96.8 million in fiscal 2005.

Accelrys held $66 million in cash, cash equivalents, restricted cash, and marketable securities as of March 31.

Restatement Uncovers 'Control Weaknesses'

David Sankaran, Accelrys CFO, said during the conference call that the financial restatement had minimal impact on the company's bottom line over the past five years, and that its statements now reflect "higher levels of deferred revenue at the end of each of the previously reported three fiscal periods, higher reported revenue in those periods, and reduced losses from continuing operations in each of those periods."

The restatement did, however, identify "certain control weaknesses in our accounting and reporting processes," Sankaran said. "We concluded that the company did not have sufficient numbers of employees with appropriate levels of knowledge, expertise, and training in some technical accounting principles related to revenue recognition and software development costs."

As a result, Sankaran said, "We have remediation plans in place today and actions underway to address these weaknesses." He added that the company has also hired "three senior-level accounting employees who have significant experience in these technical accounting matters."

The restated financials reflect changes in the timing of revenue recognition for the company's software contracts, as well as a change in accounting for software development costs, the reclassification of "certain items" between discontinued operations and continuing operations, and a reclassification of certain securities from cash equivalents into marketable securities.

Accelrys has also streamlined its revenue-recognition policy going forward. "Previously, under our old accounting practices, we recognized a portion of the revenue on some software contracts up front, while on others we recognized the revenues ratably over the term of the contract on a subscription basis," Sankaran said. "Now, after the restatement, for nearly all of our contracts and in all periods, we recognize revenue ratably over the term of the agreement or the term of bundled contract customer support."

— Bernadette Toner ([email protected])

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