Certara, Inc. (NASDAQ:CERT) Q4 2022 Earnings Call Transcript

Certara, Inc. (NASDAQ:CERT) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good day, and thank you for standing by. Welcome to the Certara Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session . Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler, Investor Relations. Please go ahead.

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 Andrew Schemick, Chief Financial Officer. Earlier today, Certara released financial results for the ended December 31, 2022. A copy of the press release is available on the company’s Web site. Before we begin, I’d like to remind you that management will make statements during this call that will 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 site.

In our remarks or 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 release available on the company’s Web site. For additional information, please refer to the reconciliation tables in the accompanying materials. This conference call contains time sensitive information and is accurate only as of the live broadcast today, March 01, 2023. 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. And thank you for joining Certara’s fourth quarter and full year earnings call. Andrew and I will start with prepared remarks and then we will take questions. We are pleased with the strong finish to 2022 and we have made significant progress across our key initiatives throughout the year. We believe we are well positioned for 2023 and beyond as we execute Certara’s mission to disrupt drug innovation with our proprietary biosimulation technology and services. At Certara, we are focused on safely accelerating the drug development process by lowering the cost and increasing the probability of success in trials to improve the health and well being of millions of people globally.

Before we get into the details of the quarter, I would like to announce the appointment of John Gallagher as Certara’s new CFO effective April 1st. John is a proven finance executive with experience as a public company CFO at Cue Health and a prior career in senior finance roles at Beckman Dickinson, GE and Ford. After eight successful years as CFO of Certara, Andrew Schemick, has decided that this is a good time for him to pursue other career goals. And I’m very pleased that he will be staying with Certara in a key operational and strategic role after helping with the transition to John. For the full year of 2022, our revenue and profitability metrics exceeded the upper end of our guidance ranges provided in August. Reported revenue of $336 million grew by 17% year-over-year and 10% year-over-year excluding Pinnacle 21’s contribution.

We are encouraged by the pace of adoption and expanding awareness of Certara’s biosimulation platform worldwide. The strong demand for biosimulation in 2022 contrasted with the underperformance of our regulatory business, which resulted in total company growth excluding Pinnacle 21 and the low double digits compared with our historical rates of mid teens. I am optimistic that our regulatory business has turned the corner and we are seeing early indications of the changes we made in the second half of 2022 will translate into better performance overtime. Andrew will discuss more about the company’s financial outlook but we expect improved performance in our regulatory business in 2022. Pinnacle 21 has been operating within Certara for over a year and we are pleased with the contributions from the Pinnacle 21 team.

Pinnacle 21 delivered at or above all our expectations in 2022 and we are excited about what the team has been able to do with the platform headed into 2023. We continue to reach new customers with our end-to-end platform and finish 2022 with 2,376 customers. Our land and expand strategy delivered solid growth among existing customers in 2022 as well, with about 50% of total company revenue generated from the top 50 global therapeutics companies. As of December 31, 2022, we had 370 customers with an annual contract value of more than $100,000, representing growth of 24% year-over-year. We had 57 customers with an annual contract value of more than $1 million, up 12% from 2021. Our fourth quarter revenue was $86.6 million, representing 15% year-over-year growth on a reported basis and 18% on a constant currency basis.

Revenue growth was driven by software and biosimulation services as we continue to see strong demand across all customer categories. Fourth quarter Software segment revenue of $29.2 million represented 14% year-over-year growth on a reported basis and 19% on a constant currency basis. Our core Simcyp and Phoenix biosimulation software performed well as did Pinnacle 21, delivering at or above our financial and strategic expectations for the year. Our software updates and new products in 2022 included the annual updates on Phoenix and new versions of the Immunogenicity, Immuno-oncology and Vaccine Simulator, which were introduced into the Simcyp platform. Also in 2022, we launched the Pinnacle 21 Data Exchange Module and the Simcyp Discovery Simulator.

We are committed to finding new ways to leverage Pinnacle 21’s data organization and management platform across Certara. We are also encouraged by customer traction with Simcyp Discovery, an example of our effort to expand Certara’s biosimulation software into adjacent use cases. Similarly, we are excited to announce the acquisition of Vyasa in early January, an artificial intelligence company with scalable deep learning software. We are working to integrate the technology throughout the existing Certara platform to help customers answer complex questions across structured and unstructured biomedical information. Vyasa was relatively small bolt-on transaction and we expect the software integration process to evolve throughout the course of the year.

Fourth quarter technology driven services segment revenue was $57.5 million, which grew 15% on a reported basis and 18% on a constant currency basis compared with the fourth quarter of 2021. Biostimulation services continued to see robust demand with 2022 growing approximately 20% for the year. We expect continued strength in biosimulation services into 2023 due to encouraging bookings trends throughout the year. This is testament to the strong demand we are seeing for biosimulations as our clients expand use cases across biologics, cell and gene therapies and small molecules. Technology driven services’ reported growth was impacted by the weakness in regulatory services during 2022 as we discussed on previous calls. The regulatory business finished 2022 in line with our expectations laid out in the second quarter earnings call in August.

Over the long term, we believe regulatory services is a strategic business for Certara. It drives incremental value to our customers and is a solid business from a financial standpoint. Andrew will discuss the near term outlook for this business in more detail shortly. In 2022, we continue to invest in our business and expand our team worldwide. We prioritized hiring leading scientists and subject matter experts to support our growth. At the end of 2022, we had over 1,200 employees, including more than 380 with doctor degrees. We believe we are the employer of choice in the biosimulation industry and we offer a strong culture and commitment to innovation. In summary, we’re pleased with our performance in 2022 with the rapid development and adoption of biosimulation, and the proven success of our business development strategy.

We believe that our team is well positioned to drive success in 2023 and over the long term as we support and catalyze the adoption of biosimulation for drug research and development. I’d like to close my remarks by extending my deepest appreciation to the entire organization of Certara. The hard work and dedication of our people drive our mission forward. I’ll now turn it over to our CFO, Andrew Schemick ,to discuss our fourth quarter and full year financial results in more detail.

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Andrew Schemick: Thank you, William. Hello, everyone. Total revenue for the three months ended December 31, 2022 was $86.6 million, representing year-over-year growth of 15% on a reported basis and 18% on a constant currency basis. For the full year 2022, total revenue was $335.6 million, which represents 17% growth on a reported basis and 20% growth on a constant currency basis. Excluding Pinnacle 21, full year 2022 growth was 12% on a constant currency basis. Note that we have owned Pinnacle 21 for more than a full year as of October 2022, and we will be reporting the business as part of our consolidated financials going forward. Bookings, which provides visibility into the year ahead, came in at $408.9 million for the trailing 12 month period ended December 31, 2022 and were up 20% year-over-year.

Our total company book to bill ratio ended the year at 1.22. Software revenue was $29.2 million in the fourth quarter, which increased 14% over the prior period on a reported basis and 19% on a constant currency basis. The growth in the quarter was driven by Pinnacle 21 new products and biosimulation software. For the full year, software revenue was one $115.5 million, up 33% on a reported basis and 38% on a constant currency basis. Excluding Pinnacle 21, full year software revenue grew 14% on a constant currency basis. Ratable and subscription software revenue amounted to 60% of total software revenue for the year, up from 54% in the prior year. Subscription ratable revenue accounted for 67% of the fourth quarter revenues. Software bookings were $39.5 million in the fourth quarter, which increased 22% from the prior year period.

Trailing 12 months software bookings were $124.8 million, up 32% year-over-year. The software aggregate renewal rate was 88% in the fourth quarter, down due to timing but resulting in a 91% rate for the year, which is in line with our plan. Services revenue was $57.5 million in the fourth quarter, which increased 15% over the prior year period on a reported basis and 18% on a constant currency basis. For the full year, services revenue was $220.2 million, up 10% on a reported basis and 13% on a constant currency basis. As we previously discussed, biosimulation services revenue growth remained strong in 2022 and was 20% while regulatory services was a drag on the overall growth rate. Technology driven services bookings in the fourth quarter were $80.9 million, which increased 1% from the prior year period.

Trailing 12 month services bookings were $284.1 million, which increased 15% as compared to the prior year. As expected, regulatory services bookings growth was down in the quarter while biosimulation booking trends continued to be strong. The cost of revenue for the fourth quarter of 2022 was $31.8 million, an increase from $29.3 million in the fourth quarter of 2021, primarily due to $3.5 million increase in employee related costs, $1.1 million increase in other costs of revenues, such as equipment, travel and software licenses, offset by lower stock based compensation and outside consulting costs of $1.6 million. Total operating expenses for the fourth quarter of 2022 were $43.5 million, an increase from $42.6 million in the fourth quarter of 2021.

The components of operating expenses are as follows. Sales and marketing expenses were $7.8 million compared to $6.7 million for the fourth quarter of 2021. This increase is primarily due to $0.6 million in employee expenses due to the expansion of the sales force and $0.5 million increases in marketing and travel costs. R&D expenses were $6.6 million compared to $6.5 million for the fourth quarter of 2021. R&D expenses were up slightly due to R&D expense from acquisitions in 2021 and the timing of other related investments in research and development. G&A expenses were $18.3 million compared to $18.7 million for the fourth quarter of 2021. The decrease was primarily due to $1.8 million decrease in transaction and M&A costs, $1.5 million decrease in stock based compensation, offset by $2.2 million of employee related costs.

Intangible asset amortization was up slightly at $10.3 million compared to $10.2 million in the fourth quarter of 2021. Depreciation and amortization expense was $0.4 million flat with last year. Continuing down the P&L, interest expense was $5.4 million compared to $3.3 million for the fourth quarter of 2021 due to higher interest expense relating to our term loan. Miscellaneous expense was $2.2 million compared to $0.3 million for the fourth quarter of 2021 due primarily to $2.5 million in remeasurement loss related to fluctuation and foreign currency exchange rates. The income tax benefit was $5.4 million, bringing the full year provision to $4 million compared to $9.9 million in the prior full year as a result of a change in the mix of earnings among jurisdictions, the impact of non-recurring income tax rate changes and the tax planning project completed in the second half of 2022 to take the benefit of previously unrecognized foreign tax credits.

Net income for the fourth quarter of 2022 was $9.2 million compared to a net loss of $9.7 million in the fourth quarter of 2021. Reported adjusted EBITDA for the fourth quarter of 2022 was $31.9 million compared to $28.2 million for the fourth quarter of 2021, representing 13% growth. Adjusted EBITDA margin was 36.8% in the fourth quarter of 2022 and 35.8% for the full year of 2022. Reported adjusted net income for the fourth quarter of 2022 was $25.2 million compared to $9.8 million for the fourth quarter of 2021. Diluted earnings per share for the fourth quarter of 2022 was $0.06 as compared to a loss of $0.06 in the fourth quarter of 2021. Adjusted diluted earnings per share for the fourth quarter of 2022 was $0.16 compared to $0.06 in the fourth quarter of 2021.

Now moving to the balance sheet. We ended the quarter with $236.6 million of cash and cash equivalents. As of December 31, 2022, we had $297.5 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance. For the full year 2023, we expect total revenue in the range of $370 million to $385 million, representing 10% to 15% growth compared with 2022. Our revenue guidance assumes continued strength in software and biosimulation services where we have good visibility given our trailing 12 month bookings. The guidance also assumes regulatory services growth in the low single digits as compared to 2022, and software subscription revenue continues to rise to increase as a percentage of total software revenues.

We expect adjusted EBITDA in the range of $131 million to $137 million, adjusted EPS in the range of $0.50 to $0.55 per share, fully diluted shares in the range of $159 million to $152 million, a tax rate in the range of 25% to 30%. And one last thing before we turn the call over to questions. With today’s announcement, I want to take the opportunity to welcome John to Certara. John has an impressive background and his experience with Cue Health and Beckman Dickinson have prepared him well for the opportunity with Certara. Over the past nine years, Certara has evolved and grown significantly. Since becoming public, we have put a long term strategic plan in place that the team has been successfully executing against. After six years as a private company CFO and two years as a public company CFO, now is a good time to transition CFO responsibilities to someone else.

Following a transition period that will ensure a smooth and orderly transition of responsibilities to John, I intend to remain with Certara and focus on operations and growth initiatives. I’ll now turn the call back over to our CEO, William Feehery, for closing remarks.

William Feehery: Thank you, Andrew. I’d like to personally thank Andy for his outstanding job as CFO of Certara. During his nine years as CFO, the company transitioned through two private owners and then had an IPO in 2020. Also during that time, the company has grown over 6 times in people and revenues, and it remained consistently profitable. And most importantly, he helped Certara build a world class finance organization that we will continue to benefit from for years to come. I’m very happy that we are able to retain someone with Andy’s qualifications and knowledge of the company as we plan for the next phase of Certara’s growth. To summarize our message today, we’re pleased with our 2022 results and we believe that Certara is well positioned for growth this year and in the future as we continue as a global leader in biosimulation. We will now open up the line for questions. Operator, can you please open the line?

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Q&A Session

Operator: Our first question comes from the line of David Windley from Jefferies.

David Windley: I guess, in biosim you talked about some real strength there and particularly I guess in services, it looks like you are having nice luck with new logo, nice effort and maybe not luck with new logos over the last year or so. Could you, Bill, help with kind of the relative strength of demand, between large customers and small, and just kind of help us to understand what’s pushing that and what their uptake is, is it software, i.e. large customers or more services in the small customers? I’m just interested in by customer cohort commentary.

William Feehery: So about 50% of our business across the company is with the top 50 pharma and the other 50% is with the other roughly 1,700 customers we have. And during the fourth quarter, both of them grew fairly equally in revenue. So I think it was about 15% for both segments. But it’s also true what you said the buying patterns are a little bit different, the larger customers tend to skew more towards software sales, they tend to be members of our consortium, which counts as software sales and many of our biotech customers are services customers, although, it’s not a 100% one way or the other, we have smaller customers that purchase software and we certainly provide services to the large ones, that’s just sort of a general trend. I would say, nothing particularly new in this area. It’s been this kind of this trend for a number of years right now, and we saw just kind of a continuation of that progress in the fourth quarter.

David Windley: Just as a follow-up to that. In terms of that — you correct me if I’m wrong, but I presume a lot of your new logos come from kind of newly formed or relatively young companies in the biotech space. The funding environment for them has been more challenging in the last year or so, and Novavax had a kind of — I think to a lot of people shocking announcement last night. What kind of diligence or vetting, balance sheet durability work do you guys do on that customer basin, are you seeing any potential risks there?

William Feehery: So the bulk of the revenues that Certara get are in drugs that get to late phase development, clinical development. And what we’re seeing is they’re still financing opportunities for anyone who gets a drug that far. The work we do with the early stage customers tends to constitute a fairly small fraction of our revenues, mostly we’re doing small projects for them, we’d like to introduce the possibilities of Certara to them and develop our relationship as they hopefully get bigger. But they won’t tend to spend a ton with us until they get their drug farther along. To answer your second question, I can — Andy can chime in here, but — well go ahead, Andy, why don’t you talk about that part?

Andrew Schemick: Just in terms of the diligence, and we — obviously, with the accounting rules you’re required to ensure that the customers got the funds available in order to recognize revenue. So we have a — we do credit checks upfront and reviews of our AR on a monthly basis. So we’re pretty on top of those things. We did see an increase in the bad debt reserve compared to last year, it was related to some isolated incident but not a widespread issue in terms of anything.

David Windley: And then last question for me is, just a description of the health of the reg services business. It sounds like you expect it to grow. I’d be interested if you put a number on what it actually delivered in 2022, was it down, flat? You said it drug on growth, like what was the performance? And then are you seeing some of those delayed projects come back, are you seeing new bookings, what gives you so they can grow a little bit in €˜23?