Certara, Inc. (NASDAQ:CERT) Q1 2024 Earnings Call Transcript

Certara, Inc. (NASDAQ:CERT) Q1 2024 Earnings Call Transcript May 8, 2024

Certara, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Certara First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, David Deuchler.

David Deuchler: Good afternoon, everyone. Thank you all for participating in today’s conference call. On the call from Certara, we have William Feehery, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information, which you can find on the company’s Investor Relations website.

In their remarks and responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company’s website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I’ll turn the call over to William.

William Feehery: Thank you, David. Good afternoon, everyone. Thank you for joining Certara’s first quarter earnings call. John and I will start with prepared remarks and then we will take your questions. Throughout the first quarter, Certara built upon the solid business momentum observed in the fourth quarter of 2023. We are pleased with our start to the year, delivering total revenue of $96.7 million representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI-enhanced products continues to grow following the acquisition of Vyasa just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, Certara’s products and services remain top of mind.

We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R&D initiatives. Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, it will take time for funding to translate into bookings and sales at Certara and we have not yet seen an inflection point in activity through the first several months of the year. Internally, our focus remains on several key initiatives that will drive Certara’s next stage of growth.

On our last earnings call, we highlighted the investments we are targeting in 2024, including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities. We are dedicated to unifying our organization both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, a unifying platform that integrates access to our entire software suite of applications. Certara Cloud will make our software solutions easier to navigate across each user’s organization and with external parties, enabling collaboration across different workflows. Certara Cloud already has 1,500 client-specific portals and is currently used by 15 of the top 30 biopharmaceutical companies.

Investments like Certara Cloud and other initiatives underway are designed to ease access to the Certara platform, improve data and information security and deliver enhanced capabilities to customers. I am proud of the work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now turning to the performance of the business. In the first quarter, we delivered software revenue of $39.3 million representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry leading Simcyp, Phoenix and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix hosted, which is a cloud-based version of the product.

With cloud computing integrated into Phoenix, customers will have immediate access to upgrades, remote workflow processing and improve performance and run times. Customer uptake continued to progress nicely and we are pleased by the feedback we have received to-date. Throughout the quarter, our software team also began to accelerate the development of CoAuthor, a regulatory writing tool that uses AI and machine learning to drive regulatory submissions. The next version of CoAuthor will be officially launched at the end of the second quarter and early versions are used by our internal regulatory writing team on customer projects. Over time, CoAuthor will drive efficiencies across different regulatory writing processes and we have received significant interest from customers.

Our technology-driven services segment delivered revenue of $57.3 million in the first quarter, which was flat year-over-year on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious customer spending in 2023. In the first few months of the year, we have been encouraged by customer discussions across our services group. Certara’s ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements.

In conclusion, Certara is in a strong position to grow in 2024 headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for biosimulation, while also making our products easier to use. I am confident in our ability to meet our 2024 goals and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.

John Gallagher: Thank you, William. Hello, everyone. Total revenue for the 3 months ended March 31, 2024 was $96.7 million, representing year-over-year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39.3 million in the first quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by Biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 61% of first quarter software revenues, up from 56% in the prior year period. Software bookings were $33.1 million in the first quarter, which increased 8% from the prior year period. Trailing 12-month software bookings were $139.5 million, up 11% year-over-year.

In the first quarter, the software net retention rate was 114%, which is consistent with our long-term growth profile. Now, turning to services revenue, which was $57.3 million in the first quarter flat versus the prior year period on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. Technology-driven services bookings for the first quarter were $72.7 million, which decreased 11% from the prior year period. Trailing 12-month services bookings were $256 million, also down 11% as compared to the prior year. Total cost of revenue for the first quarter of 2024 was $39.3 million, an increase from $34.9 million in the first quarter of 2023 primarily due to a $1.9 million increase in employee-related expenses, a $1.2 million increase in stock-based compensation, and a $0.8 million increase in software amortization.

Total operating expenses for the first quarter of 2024 were $58.7 million, an increase from $48 million in the first quarter of 2023. The components of operating expenses are as follows. Sales and marketing expenses were $10.7 million compared to $8 million in the first quarter of ‘23. This increase is primarily due to a $1.7 million increase in employee-related expenses due to the expansion of the sales force. R&D expenses were $12 million compared to $9.3 million for the first quarter of 2023. R&D expenses were up primarily due to a $3 million increase in employee-related costs as we grew our team of software developers. G&A expenses were $23 million compared to $19.8 million for the first quarter of 2023. The increase was due to a $1.6 million change in contingent consideration primarily related to the acquisition of Vyasa and a $1.1 million increase in employee-related expenses, partially offset by a $0.9 million decrease in stock-based compensation.

Intangible asset amortization was $12.6 million compared to $10.5 million in the first quarter of 2023. Depreciation and amortization expense was $0.4 million, flat with last year. Continuing down the P&L. Interest expense was $5.8 million compared to $5.5 million for the first quarter of 2023 due to higher interest on the floating rate portion of our term loan. Miscellaneous income was $1.6 million compared to $0.5 million in the first quarter of 2023 primarily related to the return on our cash invested. Income tax was a benefit of $0.8 million compared to an expense of $1.1 million for the first quarter of 2023. Net loss for the first quarter of 2024 was $4.7 million compared to net income of $1.4 million in the first quarter of 2023. Reported adjusted EBITDA for the first quarter of 2024 was $29.1 million compared to $32.3 million for the first quarter of 2023.

Adjusted EBITDA margin was 30% for the first quarter of 2024. Reported adjusted net income for the first quarter of 2024 was $16.5 million compared to $19.3 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was $0.03 compared to earnings per share of $0.01 in the first quarter of 2023. Adjusted diluted earnings per share for the first quarter of 2024, was $0.10 compared to $0.12 for the first quarter of last year. Now moving to the balance sheet. We ended the quarter with $224.8 million of cash and cash equivalents. As of March 31, 2024, we had $287.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows.

We expect total revenue in the range of $385 million to $400 million, representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar figure basis in 2024 and expect adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of $0.41 to $0.46 per share, fully diluted shares in the range of $160 million to $162 million, and the tax rate in the range of 25% to 30%. I will now turn the call back over to our CEO, William Feehery for closing remarks.

William Feehery: Thank you, John. To summarize our message today, we are pleased with our first quarter results, and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology. We will now open the line for questions. Operator, can you open the line.

Operator: Thank you. [Operator Instructions] Our first question comes from David Windley at Jefferies.

See also 8 Powerful Alternatives to Elasticsearch and 20 Most Profitable Banks in the US in 2024.

Q&A Session

David Windley: Hi, good evening. Thanks for taking my question. I wanted to start with a question on the Cloud launch. Bill, I think you mentioned 1,500 or something in that neighborhood client portals that you’ve already established in 15 of the top 30 biopharmas wondered if you could add a little more detail to that. And then maybe describe – again, you mentioned those top biopharma. So I’m wondering whether the uptake is more skewed to your larger clients or smaller or across the board and just basically how that uptake is proceeding and how it matches with your expectations?

William Feehery: Great. Thanks, David. Appreciate the question. So the Certara Cloud is our first step – well, it’s our next step, I would say, towards making the suite of Certara software products into a true platform. So what we’re doing is we’re setting this up so that our new launches of products. That is how you access them. And so you’ll see – obviously, we have, as you pointed out, quite a number of customers who are starting to use it today, and that will naturally increase as we go forward and as new releases of products come out where that’s really the only way to access the software. We started out – to answer your question directly, we started out with some smaller ones just to make sure that – that everything was operational and then we’ve been migrating to the larger ones.

But it should accelerate as we go through the year. We’re pretty excited about this because it has a couple of advantages to us. One is it’s a way to promote reuse of certain software modules across our platform. So instead of writing them for every piece of our – every product we have, we can write them once and we can use a best-in-class functionality across all of our products. We’re also getting to unite the look and feel of our products. And also, this enables us to more easily share data between them. So it’s also probably have some good marketing advantages in terms of, yes, when companies log in, they see which products they have and which products they could have, and we can have a good conversation with them from that standpoint.

So we’re pretty excited about it. It’s kind of the next evolution of our software – and as you pointed out, it’s got a good uptake from our customers.

David Windley: On – as a follow-up to that, I believe you’ve regularly versioned Simcyp every year – and I believe that versioning, and you probably do that on other products, but just calling out Simcyp, I believe that versioning drives economics for you, you add capabilities and maybe get a little bit more if nothing else inflationary price, are those types of economics going to be the same in the cloud-hosted products or will that change?

William Feehery: Yes. So Simcyp, as you pointed out, we launched – we have a new version every year. Some other ones, it’s a little bit different. For example, Phoenix, we’re moving to an every 6-month cycle. So there’s certainly an advantage to our economics in terms of each one has additional features and there’s a reason to upgrade. Not everybody – I think with the 6-month cycle, we’ll see maybe people might not do every 6 months, but they’ll sort of be an increasing pressure to do that. In terms of the economics of this, I think a lot of this has to do with when we had desktop installations, a lot of our customers have to go through expensive software validation projects and those become less onerous as we move to the Cloud, partly because we can do a lot of the work ourselves and we could share that with them. And so we hope also that we’ll get – that will also foster more frequent updates as well.

David Windley: Got it. And if I could just ask one more on your guidance on the revenue I believe, at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically little less than half inorganically. I wondered if you could confirm that, that’s still your thinking? And could you break out the organic versus inorganic contribution in the first quarter? Thanks. That would be it for me.

John Gallagher: Yes. Hi, David. So here on the quarter, we put up 7% revenue growth and as we said when we first put out the guidance, and we’re still confident in that guidance, by the way. But when we first put that out, we said that on the services side, there’d be a bit of a first half, second half story or a ramp into the later part of the year related to that part of the business. So we still anticipate that to be the case. And so Q1 came in line with our expectations. On an organic basis, the deals contributed a few hundred basis points to the growth on the quarter.

David Windley: Okay. Great. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Jeff Garro at Stephens.

Jeffrey Garro: Hi, good afternoon. Thanks for taking the questions. Maybe a couple for me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I wanted to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start?

John Gallagher: Yes. On services bookings, we did experience some timing on bookings, but it was actually on the software side more so than it was on the services side. So software bookings had some timing that on some large Pinnacle deals that were scheduled for March ended up coming in April, and those have come in and we don’t have any concerns about it. On the services side, though, to your question, the story there is on the Tier 1s, it’s more of a tough compare. So if you look back at services bookings – then we have a very large Q1 of 2023 on the services side, and so there’s a tough compare there. As you look at the other tiers, though, then the business is still recovering. So our recovery is still in place.

So when you look at Tier 2 and Tier 3 bookings then what we’re seeing is sort of stability from where we were in the second half of last year. So if you look at Q3 and then look at Q4 and now Q1 services bookings are kind of in line on a dollar basis with what we were expecting to be the case there. So – so a little bit of a tough comp is one on pressuring the growth rate, but then from a dollars perspective and achievement, it’s playing out as we expected with Tier 1 or the Tier 2 and Tier 3s, still not back to their historic levels.

Jeffrey Garro: I appreciate the granularity there on customer pigmention, maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth. How should we think about services bookings or backlog converting to revenue for the fiscal year? It looked like nice execution on that front here in the first quarter. Should we expect more sequential improvement from here or does the first quarter represent kind of the right velocity of conversion for looking at things from say a trailing 12-month services bookings to revenue conversion perspective?