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ACCL > SEC Filings for ACCL > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for ACCELRYS, INC.


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report") contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. These statements are often identified by the use of words such as "expect", "believe", "anticipate", "estimate", "intend", "plan" and similar expressions and variations or negatives of these words. These forward-looking statements may include statements addressing our future financial and operating results. We have based these forward-looking statements on our current expectations about future events. Such statements are subject to certain risks and uncertainties including those related to the execution of our strategic plans, the successful release and acceptance of new products, the demand for new and existing products, additional competition, changes in economic conditions and those described in documents we have filed with the Securities and Exchange Commission (the "SEC"), including this Report in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" and subsequent reports on Form 10-Q and Form 10-K. All forward-looking statements in this document are qualified entirely by the cautionary statements included in this Report and such other filings. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Unless the context requires otherwise, in this Report the terms "we", "us" and "our" refer to Accelrys, Inc. and its wholly owned or indirect subsidiaries, and their respective predecessors.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Report.
Overview
On July 1, 2010, pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated April 5, 2010 (the "Merger Agreement"), by and among us, Alto Merger Sub, Inc., our wholly-owned subsidiary ("Merger Sub"), and Symyx Technologies, Inc. ("Symyx"), Merger Sub merged with and into Symyx, with Symyx surviving as our wholly owned subsidiary (the "Symyx Merger"). Symyx's operating results are included in our consolidated financial statements and results of operations beginning July 1, 2010.
On May 19, 2011, we completed the acquisition of Contur Software AB ("Contur"), whereby Contur became our wholly owned subsidiary (the "Contur Acquisition"). Contur's operating results are included in our consolidated financial statements and results of operations beginning May 19, 2011.
On December 30, 2011, we completed the acquisition of VelQuest Corporation ("VelQuest"), whereby VelQuest became our wholly owned subsidiary (the "VelQuest Acquisition" and, together with the Symyx Merger and the Contur Acquisition, the "Acquisitions"). VelQuest's operating results are included in our consolidated financial statements and results of operations beginning December 30, 2011. On May 17, 2012, we acquired a proprietary web-based Hit Explorer Operating System ("HEOS") software from Scynexis, Inc. The operating results of HEOS are included in our consolidated financial statements and results of operations beginning May 17, 2012.
On October 23, 2012, pursuant to the terms of the Agreement and Plan of Merger, dated as of such date, by among us, Aardvark Acquisition Corp., our wholly owned subsidiary ("Aegis Merger Sub"), Aegis Analytical Corporation ("Aegis") and Shareholder Representative Services LLC, Aegis Merger Sub merged with and into Aegis, with Aegis surviving as our wholly owned subsidiary (the "Aegis Merger"). The information presented in this Report does not give effect to the Aegis Merger.
Our Business
We develop and commercialize scientific informatics software products and services for industries and organizations that rely on scientific innovation to differentiate themselves in the marketplace. Historically, our products were primarily utilized by our customers' research organizations. As a result of the Acquisitions, we increased the breadth and depth of our scientific product portfolio by adding a set of complementary scientific applications, content databases, technologies and domain expertise. In addition, we have expanded our focus to include products that are utilized by our customers' development and early manufacturing organizations. In particular, the addition of the VelQuest suite of products gives us even greater capability downstream, extending our solutions into the quality assurance and quality control areas in large pharmaceutical companies. Collectively, our products and services are intended to optimize our customers' research and development value chain, from


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early research through development into early manufacturing. Our software is used by our customers' scientists, biologists, chemists and information technology professionals to design, execute and manage scientific experiments in-silico or in the lab and to aggregate, mine, manage, analyze and interactively report on the scientific data from those experiments. Our solutions also enable the development process to scale more effectively and bring increased automation to the transition from development to early manufacturing, manage quality control with external collaborators and reduce compliance risk. The ability to integrate and access data from diverse data sources and to make that information accessible throughout the scientific value chain enables our customers to reduce costs, enhance productivity and more efficiently provide innovative and effective products to their customers. Our customers include leaders from a variety of industries, including pharmaceutical, biotechnology, agricultural, energy, chemicals, aerospace, consumer packaged goods and industrial products, as well as various government and academic entities. We market our software products and services worldwide, principally through our direct sales force, augmented by the use of third party distributors. We are headquartered in San Diego, California and were incorporated in Delaware in 1993.
Description of Our Markets and Business
Our customers differentiate themselves through scientific innovation. As a result, innovation in the discovery and development of new products, compliance with applicable regulations, rapid, cost-effective commercialization of such products and the ability to protect the intellectual property therein is crucial to our customers' success. Therefore, they invest considerable resources in technologies that help identify productive new pathways for research projects, help develop new materials, increase the efficiency of discovery and development processes, and otherwise enable them to maximize the use of scientific data, information and knowledge. Our software solutions allow our customers to effectively design, plan and execute scientific experiments in a repeatable process and in compliance with regulations; leverage the vast amounts of information stored in both corporate databases and public data sources to optimize their processes and accelerate innovation; model, predict and analyze potential scientific outcomes; and access comprehensive, integrated and cross-referenced databases and reference works.
The pharmaceutical and biotechnology industries are a very important part of our business. Our products have been widely adopted within the research functions of businesses in these industries, but less widely adopted by the development functions of such businesses. In addition, these markets present challenges due to industry consolidation, the maturity of these markets, patent expirations, reduction in the level of discovery research activity, increased competition, including competition from open source software, and outsourcing of research to other entities. The other industries to which we market our products, including energy, material, agricultural, aerospace and consumer packaged goods, are earlier in the adoption curve for such scientific software products, which we view as both a challenge and an opportunity. Business Strategy
Scientific research and development organizations face several challenges that impact their ability to comply with applicable regulations, protect their intellectual property and rapidly and cost-effectively bring products to market. Among these challenges is the fact that scientific data is often found in disparate databases and that research, development and early manufacturing processes are disconnected, manually intensive, inefficient and repetitive. Our overall strategy is to extend beyond our historically strong presence in research downstream into development and early manufacturing, covering the entire research and development value chain; to move into new scientific domains, including biology; and to expand our presence outside of the pharmaceutical and biotech industries into other key industries such as food and beverage, fine and specialty chemicals and aerospace. We do this by addressing the core challenges faced by research and development organizations, offering them an open enterprise-scale scientific software platform and a broad portfolio of scientific software applications leveraging our deep domain expertise in chemistry, biology and the materials sciences. We believe the combination of our enterprise R&D platform and associated set of applications, including the Electronic Lab Notebook ("ELN"), computer aided design modeling and simulation software, data management and informatics software, content and professional services, help optimize our customers' scientific value chain.
We believe that the combination of our products with the products and domain expertise we acquired as a result of the Acquisitions (most significantly the ELN and the VelQuest product suite) enables us to provide greater value to the development and early manufacturing functions of our customers' organizations. Our plan is to continue to integrate and augment our offerings in order to further enhance the value of the products we acquired and the value of our products' collective portfolio to these organizations, thus enabling us to expand upon our presence in the research and development organizations of our existing customers. The VelQuest Acquisition extended our software portfolio into pharmaceutical development quality assurance and quality control, offering significant productivity improvements, faster cycle times, lower operational costs and reduced compliance risks for regulated life sciences organizations. We also intend to continue to develop


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advanced analysis, scientific and reporting component collections in order to extend our platform's value to and use by our customers Our strategy also includes offering professional services to further tailor our enterprise R&D platform to our customers' individual business needs, thereby increasing its utility and value. Because our enterprise R&D platform is the underlying operating platform for many products in our broad portfolio, and integration with the applications obtained as part of the Acquisitions continues to be a development priority, we expect the use of these products to expand as the use of our platform grows, thus further increasing our sales and value to our customers.
Our enterprise R&D platform is an open platform. We partner with third party organizations and academic institutions which develop scientific software and services, and we enable and encourage these companies to develop applications that operate on our platform, further proliferating its utility and value to our customers.
We also focus on industries in markets where scientific innovation is a key differentiator, but the use of scientific software solutions has not been widely adopted. As we develop a greater presence in these markets, we believe our ability to attract additional customers will increase. Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our annual report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 13, 2012 (the "Form 10-K"). Except for the changes to our critical accounting policies and estimates discussed below, we believe that there were no significant changes in our critical accounting policies and estimates since December 31, 2011. Results of Operations
Historically, we have received approximately two-thirds of our annual customer orders in the quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we have generally experienced an increase in operating costs and expenses during the quarters ended December 31 and March 31 with only a minimal corresponding incremental increase in revenue. As a result of these seasonal variations, we believe that sequential quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent interim period.


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Comparison of the Three Months Ended September 30, 2012 and 2011 The following table summarizes our results of operations as a percentage of revenue for the respective periods:

                                                                Three Months Ended September 30,
                                                                    2012                 2011
Revenue:
License and subscription revenue                                     57  %                56  %
Maintenance on perpetual licenses                                    24  %                25  %
Content                                                               7  %                12  %
Professional services and other                                      12  %                 7  %
Total revenue                                                       100  %               100  %
Cost of revenue:
Cost of revenue                                                      24  %                23  %
Amortization of completed technology                                  5  %                 6  %
Total cost of revenue                                                29  %                29  %
Gross profit                                                         71  %                71  %
Operating expenses:
Product development                                                  24  %                23  %
Sales and marketing                                                  32  %                32  %
General and administrative                                           11  %                11  %
Business consolidation, transaction and restructuring costs           1  %                 6  %
Purchased intangible asset amortization                               5  %                 7  %
Total operating expenses                                             73  %                79  %
Operating loss                                                       (2 )%                (8 )%
Royalty and other income, net                                         5  %                 2  %
Income (loss) before income taxes                                     2  %                (6 )%
Income tax expense                                                    1  %                 1  %
Net income (loss)                                                     1  %                (6 )%

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.
Revenue
Total revenue increased to $40.5 million for the three months ended September 30, 2012, as compared to $36.3 million for the three months ended September 30, 2011. The increase in revenue during the quarter ended September 30, 2012 was attributable to incremental revenue from the Contur and VelQuest acquisitions, combined with a decrease in the impact of acquisition-related valuation adjustments on revenue recognition related to the Symyx Merger and the Contur Acquisition. Total revenue generated in the U.S. accounted for $19.8 million, or 49% of revenue for the three months ended September 30, 2012, compared with $16.7 million, or 46% of revenues for the three months ended September 30, 2011. International revenues accounted for $20.7 million, or 51% of revenue for the three months ended September 30, 2012, compared with $19.6 million, or 54% of revenues for the three months ended September 30, 2011.
License and subscription revenue. License and subscription revenue increased to $23.2 million for the three months ended September 30, 2012, as compared to $20.1 million for the three months ended September 30, 2011. As a percentage of total revenue, license and subscription revenue increased to 57% for the three months ended September 30, 2012, as compared to 56% for the three months ended September 30, 2011. The increase in license and subscription revenue during the quarter ended September 30, 2012 was primarily attributable to additional revenue resulting from the Contur and the VelQuest acquisitions, combined with an incremental increase as a result of a decrease in revenue impacted by acquisition-related valuation adjustments related to the Symyx Merger. Maintenance on perpetual licenses. Maintenance on perpetual licenses revenue increased to $9.6 million for the three months ended September 30, 2012, as compared to $9.2 million for the three months ended September 30, 2011. As a percentage of total revenue, revenue from maintenance on perpetual licenses decreased slightly to 24% for the three months ended September 30, 2012, as compared to 25% for the three months ended September 30, 2011. The increase in revenue from


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maintenance on perpetual licenses during the quarter ended September 30, 2012 was primarily related to incremental revenue from the VelQuest Acquisition. Content. Content revenue decreased to $2.9 million for the three months ended September 30, 2012, as compared to $4.2 million for the three months ended September 30, 2011. As a percentage of total revenue, content revenue decreased to 7% for the three months ended September 30, 2012, as compared to 12% for the three months ended September 30, 2011. The decrease in content revenue during the quarter ended September 30, 2012 was attributable to the previously announced phase-out of certain content product lines.
Professional services and other. Professional services and other revenue increased to $4.8 million for the three months ended September 30, 2012, as compared to $2.7 million for the three months ended September 30, 2011. As a percentage of total revenue, professional services and other revenue increased to 12% for the three months ended September 30, 2012, as compared to 7% for the three months ended September 30, 2011. The increase in revenue from professional services and other during the quarter ended September 30, 2012 was primarily attributable to an increase in revenue from contract research engagements. Total Cost of Revenue
Cost of Revenue. Cost of revenue increased to $9.8 million for the three months ended September 30, 2012, as compared to $8.3 million for the three months ended September 30, 2011. As a percentage of revenue, cost of revenue increased slightly to 24% for the three months ended September 30, 2012, as compared to 23% for the three months ended September 30, 2011. The increase in cost of revenue during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses in our services department of approximately $0.9 million from higher headcount, combined with an increase in consulting and professional fees of approximately $0.4 million and an increase in overhead expense of approximately $0.3 million, partially offset by a decrease in distributor commission expense of approximately $0.1 million. Amortization of Completed Technology. Amortization of completed technology decreased slightly to $2.1 million for the three months ended September 30, 2012, as compared to $2.2 million for the three months ended September 30, 2011. As a percentage of revenue, amortization of completed technology decreased to 5% for the three months ended September 30, 2012, as compared to 6% for the three months ended September 30, 2011.
Operating Expenses
Product Development Expenses. Product development expenses increased to $9.7 million for the three months ended September 30, 2012, as compared to $8.3 million for the three months ended September 30, 2011. As a percentage of revenue, product development expenses increased slightly to 24% for the three months ended September 30, 2012, as compared to 23% for the three months ended September 30, 2011. The increase in product development expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $1.3 million as a result of higher headcount and an increase in professional fees of approximately $0.1 million.
Sales and Marketing Expenses. Sales and marketing expenses increased to $12.8 million for the three months ended September 30, 2012, as compared to $11.5 million for the three months ended September 30, 2011. As a percentage of revenue, sales and marketing expenses were consistent at 32% for both the three months ended September 30, 2012 and the three months ended September 30, 2011. The increase in sales and marketing expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel and related expenses of approximately $1.1 million and an increase in professional fees of $0.2 million, partially offset by a decrease in overhead expense of approximately $0.1 million.
General and Administrative Expenses. General and administrative expenses increased to $4.4 million for the three months ended September 30, 2012, as compared to $4.1 million for the three months ended September 30, 2011. As a percentage of revenue, general and administrative expenses remained consistent at 11% for both the three months ended September 30, 2012 and the three months ended September 30, 2011. The increase in general and administrative expenses during the quarter ended September 30, 2012 was primarily attributable to an increase in personnel-related expenses of $0.6 million, partially offset by a decrease in professional services and other costs of $0.2 million and a decrease in overhead expense of $0.1 million.
Business Consolidation, Transaction and Restructuring Costs. Net business consolidation, transaction and restructuring costs of $0.6 million for the three months ended September 30, 2012 consisted primarily of costs related to recent acquisitions. As a percentage of revenue, net business consolidation and restructuring costs were 1% for the three months ended September 30, 2012, as compared to 6% for the three months ended September 30, 2011. We have classified all transaction and integration-related costs to business consolidation costs, transaction and restructuring costs, which for the three months ended September 30, 2012 included personnel costs of $0.2 million consisting mainly of acquisition-related contingent compensation


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and professional services costs of $0.4 million. Business consolidation, transaction and restructuring costs of $2.2 million for the three months ended September 30, 2011, consisted of $1.9 million in business consolidation costs and $0.3 million in restructuring costs. We have classified all transaction and integration related costs to business consolidation costs, which include personnel costs of $0.6 million related to employees who were notified that their employment with us was being terminated, $0.5 million of acquisition related contingent compensation related to the Contur acquisition and professional service and other costs of $0.8 million directly related to our acquisition activities, including the integration of Symyx's and Contur's businesses into ours.
Purchased Intangible Asset Amortization. Purchased intangibles asset amortization decreased to $2.1 million for the three months ended September 30, 2012, as compared to $2.6 million for the three months ended September 30, 2011. As a percentage of revenue, purchased intangible assets amortization decreased to 5% for the three months ended September 30, 2012, as compared to 7% for the three months ended September 30, 2011 and was related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Acquisitions.
Royalty and Other Income, net
Royalty and other income, net increased to $1.9 million for the three months ended September 30, 2012 as compared to $0.9 million for the three months ended September 30, 2011. Significant components of royalty and other income, net for the three months ended September 30, 2012 included net royalty income of $1.2 million, interest income of $0.6 million, amortization of the discount on promissory notes receivable of $0.3 million and foreign currency exchange gain of $0.2 million, partially offset by amortization of purchased intangible assets of $0.4 million. Significant components of royalty and other income, net for the three months ended September 30, 2011 included net interest income of $0.3 million, royalty revenue of $1.3 million and rental income of $0.2 million, partially offset by a foreign currency exchange loss of $0.1 million, royalty expense of $0.1 million and amortization of purchased intangible assets of $0.6 million.
Income Tax Expense
Income tax expense was $0.3 million for the three months ended September 30, 2012 as compared to income tax expense of $0.2 million for the three months ended September 30, 2011. Income tax expense consists of provision for income taxes for federal and state income taxes in the U. S. and income taxes in certain foreign tax jurisdictions. Income tax expense related to U.S. and foreign jurisdictions for the three months ended September 30, 2012 was $0.1 million and $0.2 million, respectively. Income tax expense for the three months . . .

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