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ACCL > SEC Filings for ACCL > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for ACCELRYS, INC.


1-Aug-2013

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 the sections entitled "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 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, 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"). 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 platform from Scynexis, Inc. The operating results of the HEOS platform are included in our consolidated financial statements and results of operations beginning May 17, 2012.
On October 23, 2012, we completed the acquisition of Aegis Analytical Corporation ("Aegis"), whereby Aegis became our wholly owned subsidiary (the "Aegis Acquisition"). Aegis's operating results are included in our consolidated financial statements and results of operations beginning October 23, 2012. On January 11, 2013, we completed the acquisition of all of the outstanding shares of Vialis AG ("Vialis"), a joint stock company organized under the laws of Switzerland (the "Vialis Acquisition" and together with the Symyx Merger, the Contur Acquisition, the VelQuest Acquisition, the acquisition of the HEOS platform and the Aegis Acquisition, the "Acquisitions").


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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 extending our offerings beyond research and into development and manufacturing. 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. The Aegis Acquisition further expands our portfolio into downstream operations with new solutions for enterprise manufacturing process intelligence. In addition, we added systems integration capabilities with the Vialis Acquisition, which strengthened our position in the laboratory informatics software market and added capabilities in the downstream analytical development, quality control, and quality assurance and manufacturing areas.
The acquisition of the HEOS platform brought a cloud-based offering that enables more efficient and streamlined drug delivery collaborations, particularly with organizations leveraging contract research organizations and other groups for externalized R&D projects.
Collectively, our products and services are intended to optimize our customers' lab-to-commercialization value chains, from early research through development into manufacturing. Our software is used by our customers' scientists, biologists, chemists, engineers 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 manufacturing, manage quality control and quality assurance operations, and monitor process and product quality, thereby reducing compliance risk. The ability to integrate and access data from diverse data sources and to make that information accessible throughout the scientific innovation value chain enables our customers to reduce costs, enhance productivity and more efficiently provide effective products to their customers that meet quality and compliance standards.
Today, we are the leading provider of scientific innovation lifecycle management software. We support industries and organizations that rely on scientific innovation to differentiate themselves. The industry-leading Accelrys Enterprise Platform provides a broad, flexible scientific solution optimized to integrate the diversity of science, experimental processes and information requirements across the research, development, process scale-up and early manufacturing phases of product development. By incorporating capabilities in applications for modeling and simulation, enterprise lab management, workflow and automation, and data management and informatics, Accelrys enables scientific innovators to access, organize, analyze and share data in unprecedented ways, ultimately enhancing innovation, improving productivity and compliance, reducing costs and improving the time from lab to market.
Our customers include leaders from a variety of industries, including the pharmaceutical, biotechnology, energy, chemicals, aerospace, consumer packaged goods and industrial products industries, 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, development and manufacturing 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, development and manufacturing 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; improve product and process understanding throughout development lifecycles; 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, quality assurance/quality control ("QA/QC") and manufacturing functions of such businesses. In addition, these markets


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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, chemicals, 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. Scientific data is often found in disparate databases and research, development and manufacturing processes are disconnected, manually intensive, inefficient and repetitive. These challenges have made it incredibly difficult for organizations to manage their scientific innovation lifecycles in order to bring novel products to market faster, more efficiently and with lower compliance risk.
Our overall strategy is to deliver solutions that help organizations manage and optimize their scientific innovation lifecycles. Consequently, we are extending beyond our historically strong presence in research downstream into development and manufacturing, covering the entire lab-to-commercialization value chain; moving into new scientific domains, including biology; and expanding our presence outside of the pharmaceutical and biotech industries into other key industries such as food and beverage, fine and specialty chemicals, oil and gas and aerospace. We do this by addressing the core challenges faced by research and development and quality 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 platform and associated set of applications and services, such as electronic lab notebooks, the laboratory execution system ("LES"), process management informatics software, design modeling and simulation software, data management and informatics software, content and professional services, help optimize our customers' scientific innovation lifecycle.
We believe that the combination of our products with the products and domain expertise we gained as a result of the Acquisitions (most significantly the VelQuest product suite, and the Aegis process management informatics software) enables us to provide greater value to the development, QA/QC and 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, development, quality control and quality assurance organizations of our existing customers. The VelQuest Acquisition extended our software portfolio into pharmaceutical development, QA/QC, and manufacturing, offering significant productivity improvements, faster cycle times, lower operational costs and reduced compliance risks for regulated life sciences organizations. The Aegis Acquisition brought products that complement the Velquest product line by expanding our footprint in downstream operations with solutions for process intelligence. We also intend to continue to develop 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 platform to our customers' individual business needs, thereby increasing its utility and value. Because our enterprise 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 acquisition of Vialis, a leading systems integrator based in Liestal, Switzerland, added new services capabilities to our portfolio and further strengthened our position in the laboratory informatics software market Our enterprise platform is an open, scientifically aware 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.


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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 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, 2012, filed with the SEC on March 6, 2013 (the "Form 10-K"). We believe that there were no significant changes in our critical accounting policies and estimates since December 31, 2012.
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 and Six Months Ended June 30, 2013 and June 30, 2012 The following table summarizes our results of operations as a percentage of revenue for the respective periods:

                                                    Three Months Ended June 30,         Six Months Ended June 30,
                                                      2013               2012            2013              2012
Revenue:
License and subscription revenue                       52  %              56  %           53  %             55  %
Maintenance on perpetual licenses                      24  %              24  %           24  %             24  %
Content                                                 6  %               8  %            6  %              8  %
Professional services and other                        17  %              13  %           17  %             12  %
Total revenue                                         100  %             100  %          100  %            100  %
Cost of revenue:
Cost of revenue                                        27  %              26  %           28  %             26  %
Amortization of completed technology                    6  %               5  %            5  %              5  %
Total cost of revenue                                  33  %              31  %           33  %             31  %
Gross profit                                           67  %              69  %           67  %             69  %
Operating expenses:
Product development                                    25  %              25  %           25  %             25  %
Sales and marketing                                    39  %              36  %           38  %             36  %
General and administrative                             10  %              11  %           10  %             11  %
Business consolidation, transaction and
headquarter-relocation costs                            5  %               -  %            5  %              1  %
Purchased intangible asset amortization                 6  %               6  %            6  %              5  %
Total operating expenses                               86  %              78  %           84  %             78  %
Operating loss                                        (19 )%             (10 )%          (17 )%             (9 )%
Gain on sale of intellectual property                  66  %               -  %           32  %              -  %
Royalty and other income, net                           5  %               9  %            4  %              7  %
Income (loss) before income taxes                      52  %               -  %           19  %             (2 )%
Income tax expense                                      2  %               1  %            2  %              1  %
Net income (loss)                                      51  %              (1 )%           17  %             (4 )%

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Revenue
                               Three Months Ended June 30,                   Six Months Ended June 30,
                              2013            2012      % Change          2013              2012      % Change
License and subscription
revenue                  $     20,487     $   21,399      (4 )%     $    42,762         $   43,096       (1 )%
Maintenance on perpetual
licenses                        9,497          9,128       4  %          19,561             18,619        5  %
Content                         2,418          3,032     (20 )%           4,986              6,575      (24 )%
Professional services
and other                       6,634          4,835      37  %          13,865              9,543       45  %
Total revenue            $     39,036     $   38,394       2  %     $    81,174         $   77,833        4  %

Total revenue for the quarter ended June 30, 2013 increased to $39.0 million, or 2%, compared to the same period last year. Total revenue for the six months ended June 30, 2013 increased to $81.2 million, or 4% , compared to the same period last year. The increase in total revenue during both periods was attributable to incremental revenue from the Aegis Acquisition and Vialis Acquisition, an increase in professional services revenue attributable to growth in services engagement orders and a decrease in the impact of acquisition-related valuation adjustments on revenue recognition related to the Acquisitions, offset by unfavorable foreign currency impact primarily in Japan.


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Total revenue generated in the U.S. accounted for $19.8 million, or 51% of revenue, for the quarter ended June 30, 2013, as compared to $18.7 million, or 49% of revenue for the same period last year. International revenue accounted for $19.2 million, or 49% of revenue for the quarter ended June 30, 2013, as compared to $19.7 million, or 51% of revenue for the same period last year. Total revenue generated in the U.S. accounted for $40.7 million, or 50% of revenue for the six months ended June 30, 2013, as compared to $38.1 million, or 49% of revenue for the same period last year. International revenue accounted for $40.4 million, or 50% of revenue for the six months ended June 30, 2013, as compared to $39.8 million, or 51% of revenue for the same period last year. License and Subscription Revenue. License and subscription revenue for the quarter ended June 30, 2013 decreased to $20.5 million , or 4%, compared to the same period last year. License and subscription revenue for the six months ended June 30, 2013 decreased to $42.8 million, or 1%, compared to the same period last year. The decrease in license and subscription revenue during both periods was primarily attributable to a decrease in orders in the first quarter of fiscal 2013.
Maintenance on Perpetual Licenses. Maintenance on perpetual licenses for the quarter ended June 30, 2013 increased to $9.5 million, or 4%, compared to the same period last year. Maintenance on perpetual licenses for the six months ended June 30, 2013 increased to $19.6 million, or 5% , compared to the same period last year. The increase in revenue from maintenance on perpetual licenses during both periods was primarily related to incremental revenue from the Aegis Acquisition and the Vialis Acquisition, offset by a decrease in orders in the first quarter of fiscal 2013.
Content. Content revenue for the quarter ended June 30, 2013 decreased to $2.4 million, or 20% , compared to the same period last year. Content revenue for the six months ended June 30, 2013 decreased to $5.0 million, or 24%, compared to the same period last year. The decrease in content revenue during both periods was attributable to the previously announced phase-out of certain content product lines.
Professional Services and Other. Professional services and other revenue for the quarter ended June 30, 2013 increased to $6.6 million, or 37% , compared to the same period last year. Professional services and other revenue for the six months ended June 30, 2013 increased to $13.9 million, or 45% , compared to the same period last year. The increase in revenue from professional services and other during both periods was primarily attributable to an increase in revenue from services engagement orders in 2012.

Total Cost of Revenue
                                  Three Months Ended June 30,             Six Months Ended June 30,
                                 2013           2012     % Change        2013          2012     % Change
Cost of revenue                   10,580       10,017       6 %          22,487       19,895       13 %
Amortization of completed
technology                         2,213        2,074       7 %           4,429        4,155        7 %

Cost of Revenue. Cost of revenue for the quarter ended June 30, 2013 increased to $10.6 million, or 6%, compared to the same period last year. The increase in cost of revenue during the quarter ended June 30, 2013 and was primarily attributable to an increases in personnel and related expenses in our services department of approximately $0.7 million from higher headcount associated with the Aegis Acquisition and the Vialis Acquisition, consulting and professional fees of approximately $0.1 million, overhead expense of approximately $0.2 million, and software and content royalties of approximately $0.2 million, partially offset by a decrease in capitalized labor costs of $0.4 million. Cost of revenue for the six months ended June 30, 2013 increased to $22.5 million, or 13% , compared to the same period last year. The increase in cost of revenue during the six months ended June 30, 2013 was primarily attributable to an increase in personnel and related expenses in our services department of approximately $1.7 million from higher headcount associated with the Aegis Acquisition and the Vialis Acquisition, consulting and professional fees of approximately $0.5 million, overhead expense of approximately $0.4 million, distributor commissions of approximately $0.3 million, software and content royalties of approximately $0.2 million, partially offset by a decrease in capitalized labor costs of $0.4 million.
Amortization of Completed Technology. Amortization of completed technology for the quarter ended June 30, 2013 increased to $2.2 million, or 7%, compared to $2.1 million for the same period last year. Amortization of completed technology for the six months ended June 30, 2013 increased to $4.4 million, or 7% , as compared to the same period last year. The increase in amortization of completed technology during both periods was attributable to an increase in intangible assets acquired in the Acquisitions.


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Operating Expenses
                                         Three Months Ended June 30,         Six Months Ended June 30,
                                         2013         2012    % Change       2013         2012   % Change
. . .
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