Expansion Of Modeling And Simulation Capabilities Will Drive Client Engagement In 2025

Key Takeaways

• Strong client interest and engagement for fiscal year 2025 could lead to expanded capabilities and significant revenue growth.
  
• Integration and cross-selling from recent acquisitions expected to enhance revenue and EBITDA margins, particularly in clinical operations and medical affairs.
  
• Heavy reliance on software revenue growth, along with constraints and declining margins, poses risks to consistent revenue amid macro challenges and client spending cuts.

Catalysts

Develops drug discovery and development software for modeling and simulation, and prediction of molecular properties utilizing artificial intelligence and machine learning based technology worldwide.

• Simulations Plus is observing a significant increase in client interest and engagement, particularly related to their planning for the fiscal year 2025, which could lead to expanded modeling and simulation capabilities and growth in revenue.
  
• Despite the challenging funding environment, there is anticipation of an uptick in client spending in 2025, indicating potential for significant revenue increase should this occur as expected.
  
• The company reported strong growth in Software revenue, led by the MonolixSuite segment, which saw a 43% increase including a major pharma's full commitment; this suggests an improved net margin and earnings given the higher profit margin associated with software.
  
• With a robust backlog in Services and a strong pipeline of future projects, as shown by increased bookings, there is an expectation for sequential improvement through the coming quarters, leading to enhanced cash flow and revenue stability.
  
• Integration and potential cross-selling opportunities with the newly acquired ALI and MC business units are expected to contribute significantly to revenue and adjusted EBITDA margins, particularly expanding into new budget opportunities within clinical operations and medical affairs.

Simulations Plus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simulations Plus's revenue will grow by 19.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 20.6% in 3 years time.
• Analysts expect earnings to reach $24.7 million (and earnings per share of $1.09) by about January 2028, up from $10.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.1x on those 2028 earnings, down from 61.3x today. This future PE is lower than the current PE for the US Healthcare Services industry at 55.6x.
• Analysts expect the number of shares outstanding to grow by 4.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Simulations Plus Future Earnings Per Share Growth

Risks

• Simulations Plus is operating in a challenging macro environment with cost constraints and limited funding, which could impact future revenue growth as clients may reduce spending in response to budget pressures.
  
• The company reported a decline in net income and diluted EPS compared to the previous year, indicating potential issues with maintaining profitability or managing expenses efficiently.
  
• Service segment revenue decreased organically due to client-driven data delays, which may signal potential issues with project execution or dependency on client schedules that could impact earnings consistency.
  
• Gross margins, both in software and services, have decreased compared to the prior year, primarily due to increased costs, which could pose a risk to maintaining healthy net margins.
  
• The heavy reliance on software revenue growth, which can be seasonal and episodic, suggests a potential risk to consistent revenue streams, particularly if there are fluctuations in customer renewals or new customer acquisition.

Valuation

• The analysts have a consensus price target of $50.0 for Simulations Plus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $119.6 million, earnings will come to $24.7 million, and it would be trading on a PE ratio of 54.1x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $30.39, the analyst's price target of $50.0 is 39.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.