Behind every progressive enterprise delivering innovation on the backbone of scientific research, there lies the support infrastructure necessary to evolve information into tangible product development. It is by optimizing efficient workflows, managing data, and modeling simulations that a scientific company can effectively compete in today's technology-focused world. One leading company providing such support solutions to these clients is San Diego-based Accelrys, Inc (ACCL). Through consistent operational performance and numerous acquisitions the company has slowly grown into a stable investment. However, is now the time to buy this promising company?
Understanding The Company
Accelrys is a global provider of scientific innovation lifecycle management software solutions. The company supports industries and organizations that rely on scientific innovation in order to effectively compete within their markets. Accelrys enables these scientific authors the ability to efficiently access, organize, evaluate, and share pertinent data that can ultimately enhance productivity, innovation, and compliance. Altogether, Accelrys play a important role in limiting the time needed from the lab to the market in order to ultimately reduce costs for its numerous clients.
Seen above, Accelrys maintains numerous locations around the world diversifying its revenue sources largely between the United States, Europe, and Asia. Accelrys has roughly 655 employees with over 200 of these carrying doctorate degrees to best support the company's base of 1300 customers. These clients span across multiple industries including Biotechnology, Chemicals, Consumer Packaged Goods, Electronics, Manufacturing, and Government. A short list of several names shown below demonstrate the Tier 1 quality clients that have come to rely on Accelrys for its software solutions.
A Look At The Latest Results
In late July, management updated its investors with its Q2 2013 earnings results. The company largely met analyst earnings expectations on a Non-GAAP basis but slightly missed when it came to revenue estimates. The company earned $0.07 off of $39 million in revenue compared to estimates of $0.07 off of $42.8 million. This resulted in little surprise to dictate the market direction one way or the other. Yet the company did have several highlights worthy of consideration for the second quarter. It announced the release of several new products including the following:
The "Experiment Knowledge Base"The enhanced "Accelrys Process Management and Compliance Suite with Discoverant 4.3"The "Accelrys Enterprise Platform 9.0"A cloud-based "Externalized Collaboration Suite"Each of these product extensions help to increase the capabilities of scientists and data researchers, and they also secure additional revenue for Accelrys. Above all, new products like the Experiment Knowledge Base [EKB] provide revolutionary capabilities when it comes to experimentation management. The EKB was designed specifically for research and development and it introduces an industry first when it comes to laboratory informatics systems. For the first time, it allows scientists the ability to search and mine experimentation data from almost any source. It also provides integration and interoperability with existing lab equipment to improve collaboration and experimentation management.
Concerning the company's operation in the second quarter, management remained upbeat over the ongoing progress. In his remarks for the conference call found here, CEO Scipio Carnecchia noted that Accelrys saw strong orders results for Q2 with a significant year-over-year increase when it came to future orders. Above all, it was noted that the company remains well positioned to grow ! in severa! l key industries such as the material science and engineering market. Carnecchia had the following to say regarding this:
"Conventional enterprise software has historically failed to meet the automation capture storage analysis and sharing needs of scientific information, a value Accelrys is uniquely positioned to provide through our highly differentiated product offering. We have made some significant investments in our field and service organizations this year in order to support and grow this market. In addition, we have sharpened our corporate development focus to identify additional acquisition opportunities for this promising market."
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The Promising Future
As for growing through acquisitions, this has been one area that Accelrys has continued to pursue and effectively consolidate. Over the last four years, Accelrys has made six noteworthy acquisitions in order to enhance its product portfolio. Accelrys merged with Symyx in 2010. It bought Contur Software and VelQuest for $13 million and $35 million respectively in 2011. Accelrys also bought HEOS and Aegis for $4.5 million and $31 million in 2012. Most recently, Accelrys bought the Swiss biosciences systems integrator Vialis AG for $5 million in 2013.
Accelrys continues to seek out opportunities to build out its scientific innovation lifecycle management platform in order to retain its leading position in this market space. There are numerous growth drivers for the company in this field. The most fundamental of these is the transformational change in the market that is driving companies to pursue enterprise systems rather than niche or home-grown solutions. Additionally, it is the recognition that enterprise systems provide more effective management over end-to-end scientific workflows which can lead to better outcomes.
Several advantages continue to exist for Accelrys. Apart from be! ing a pur! e-play enterprise provider of scientific innovation lifecycle management, the company carries an extensive expertise when it comes to chemistry, biology, and material sciences. This helps to create a competitive advantage in an industry that is difficult to break into and become established.
Additionally, Accelrys has become an industry leading provider when it comes to the Electronic Lab Notebook. By replacing paper processes with electronic workflows, the Electronic Lab Notebook cuts lab documentation time in half, reduces cycle times by 50%, and lowers costs by 25% according to the company. The adoption of this practice has also served as a growth driver for Accelrys.
Recurring Revenues And Predictability
One aspect of the company's business model that continues to stick out is the high amount of recurring revenues. Accelrys supports a licensing model in which 80% of this business is subscription and the remaining 20% is perpetual. Together, the company estimates that approximately 72% of its revenue is recurring. With renewal rates of its subscriptions, perpetual maintenance, and content in the high 80% range, this provides a high level of consistent revenue.
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Attached with the fact that businesses are unlikely to switch out of their enterprise platforms with much frequency, the enduring revenue provides a high level of predictability. This can be seen in the chart above. Fundamentally, this also provides a very clear perspective when it comes to profit visibility.
Growing Insider Interest
One final observation comes from a look at the insider transactions. It is interesting to note that one of the company's largest shareholders has been buying more company stock in recent months. ! As seen b! elow, Rgm Capital, LLC has spent several million dollars increasing its position in the company. According to the latest Form 4 found here, the insider now indirectly controls 6,392,809 shares of Accelrys. The latest purchase was conducted on August 26 in a transaction valued at $544,949. Such confidence remains a positive indicator for investors going forward.
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A Look At The Financials
Accelrys now trades with a market capitalization of $501.72 million based on the last share price of $9.04 as of August 31. The company trades with a price-to-book ratio of 2.00. Based on the expectations of analysts, the company should see earnings of $0.37 in 2014. This gives the company a rather high forward price-to-earnings ratio of 24.43. However, the company does trades with a PEG ratio of 1.44 suggesting that it remains adequately priced in respect to its earnings growth.
Historically, the gross margins for Accelrys have typically come in around 70%, a very productive cushion that has allowed the company to expand with ease. Cash flow from operating activities has roughly averaged $21 million over the last two years. The company has also put in about $10 million into research & development every quarter. Overall, the company has been heavily investing into its future. With additional revenue growth, the profitability should be more noteworthy going forward.
Conclusion
There is little that actually stands out about Accelrys that would suggest to investors that they should immediately flock to this company now. At its current valuation Accelrys remains far from cheap. The company's growth has largely been accounted for and the stock already trades at twice its book value.
Yet at the same time, it would be an understatement to neglect the numerous advantages that the company actually holds. Accelrys has carved out a lea! ding posi! tion in a very niche industry that requires extensive expertise in order to gain entry. As the company continues to build out its scientific innovation lifecycle management platform, it will also better position itself against its competition and increase its client base.
Above all, the predictability of the company's revenue remains an attractive feature for investors looking for stability. Limited volatility in the business model also suggests that Accelrys will continue to perform well through most economic environments. Perhaps this is one of the reasons why a large company insider has been adding to its holdings in recent months. However, Accelrys will be a much more attractive investment if its future growth happens to accelerate faster than what is currently expected by analysts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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