Certara, Inc. (NASDAQ:CERT) Q4 2023 Earnings Call Transcript February 29, 2024
Certara, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.11.
CERT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by. Welcome to the Certara Fourth Quarter 2023 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. [Operator Instructions] I would now like to hand the conference over to David Deuchler, Head of Investor Relations. Sir, you may begin.
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’s Certara released financial results for the quarter ended December 31st, 2023. 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 forward-looking statements. Please refer to Slide 2 in the company materials for additional information, which you can find on the company’s Investor Relations site.
In their 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 press release on the company’s website. Please refer to the reconciliation tables in the company materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today February 29th, 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 will turn the call over to William.
William Feehery: Thank you, David. Good afternoon everyone. Thank you for joining Certara’s fourth quarter and full year earnings call. John and I will start with prepared remarks and then we will take your questions. We are pleased to finish the year with a solid fourth quarter performance in both software and in technology-enabled services. 2023 presented our industry with many challenges as pharmaceutical and biotech customers were conservative in their spending amidst macroeconomic and geopolitical pressures. Our full year reported revenue growth was 6%, in line with the guidance we gave in August. This revenue growth included 14% growth in software and 1% in technology-enabled services. We had record software sales in the fourth quarter and we were encouraged to see our technology-enabled services bookings pick up in the second half of 2023.
Certara’s goal is to enable model-informed drug development or MIDD in the global biopharmaceutical industry. MIDD is an approach that utilizes biological and statistical models derived from preclinical and clinical data to inform decision-making in drug development and commercialization. Biosimulation is a critical component of MIDD that use computer-aided mathematical simulation of biological processes and systems to understand the action of a drug in a human body or in a population of humans. Certara enables our customers to use biosimulation and MIDD to increase the probability of success in bringing a new drug to market and to decrease the cost of drug development. We have an extensive and expanding list of customers within the biopharmaceutical industry, which expanded in 2023 to account of 2,395.
Within this customer base as of December 31st, 2023, we had 389 customers with an annual contract value of more than $100,000, representing growth of 5% year-over-year. We also had 63 customers with annual contract value of more than $1 million, up 11% from 2022. During the second half of 2023, we reorganized our commercial infrastructure to better sell our end-to-end solutions and the team delivered improved results in both software and services throughout the second half. With our new enterprise sales approach, we have effectively captured cross-selling opportunities, leading to expanded relationships with some of our top customers. I am very happy with the progress our team has made so far, and I’m confident that these improvements will support our commercial initiatives in the coming years.
Our software business growth of 14% in 2023 was driven by our Simcyp, Phoenix, and Pinnacle 21 platforms. We have been investing in these products to add new features, a number of which launched during 2023 and will continue to increase traction as we move into 2024. Some of the highlights in 2023 included the 22nd version of our Simcyp-PBPK simulator, which included several upgrades to our modeling and simulation capabilities. We also launched Simcyp Biopharmaceuticals, a new module designed to aid drug formulation and expand our presence in the early stages of drug development. Following the acquisition of Vyasa last January, we began to integrate AI and machine learning across our portfolio. An early example was the release of an updated version of D360, which featured deep learning models for novel chemical structure generation and automated property prediction.
We also launched CoAuthor, a new regulatory writing tool that uses generative AI to aid in the drafting of regulatory submissions. Customer feedback on our AI products has been encouraging and drove customer interest in the second half of the year. Looking ahead to 2024, we will continue to invest in our software platform. One key area of focus is our clinical data strategy. Last fall, we augmented the Pinnacle 21 data exchange with the acquisition of Formedix, a provider of data standardization and automation software. With Formedix, Certara will bring increased efficiency to clinical trial data management via an end-to-end solution. In addition to Pinnacle 21, we also plan to invest in other areas such as new models for biosimulation, new products and product features, and additional integration of AI across the platform.
As biosimulation becomes more widespread, we are broadening the range of our offerings to support additional use cases in therapeutic areas. I am confident that these investments will create new opportunities to grow our platform on a global scale and penetrate deeper into our customers’ R&D organizations. Our technology-enabled services business overcame market headwinds to deliver solid performance in the second half of 2023. In August, we announced the consolidation of our biosimulation services and regulatory services teams in order to better deliver all of Certara’s capabilities to our customers’ projects. Thus far, we are pleased with the improved execution in the services business, which is performing better as a combined organization.
Across our technology-enabled services group, we saw a pickup in new business activity, which led to sequential bookings growth in the fourth quarter. Customers of all sizes continue to recognize the value that Certara’s services can add to their modeling, simulation, and regulatory projects. We look forward to building on this momentum in 2024. As a leader of biosimulation, expanding into emerging methods of modeling and simulation is a key component of our business strategy. In December, we announced the acquisition of Applied Biomath a leading provider of QSP services. QSP, or quantitative systems pharmacology, combines computationally modeling and experimental data to simulate how the body will respond to a drug. QSP is at the cutting edge of biosimulation approaches and has vast potential to improve the biopharmaceutical R&D and informed decision-making across the drug development process.
Along with proprietary software, Applied Biomath brings a complementary customer base, which includes clients in the discovery and preclinical stages of development. By combining the Applied Biomath and Certara’s QSP teams, we are proud to have the largest QSP services group in the drug development industry. In 2023, 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. As of the end of 2023, we had about 1,400 employees, including more than 400 employees with doctorate degrees. We believe we are the employee of choice in the biosimulation industry and we offer a strong culture and commitment to innovation. We believe there is an opportunity for us to accelerate some investments in 2024 across our organization.
In particular, we intend to invest in the development of software capabilities, including AI and as well as expand our commercial organization, including key account management positions. These investments will start to yield minor benefits in 2024, but will be most impactful in 2025 and 2026. In closing, we are pleased with our 2023 results. The growth opportunity in biosimulation continues to strengthen as drug developers look to maximize capital efficiencies and reduce pipeline risk. I am confident that the secular adoption of biosimulation, our improved commercial execution and the investments we are making in our products and our team, will support strong growth in 2024 and beyond. I will now turn it over to our CFO, John Gallagher, to discuss our fourth quarter and full year financial results in more detail.
John Gallagher: Thank you, William. Hello everyone. Total revenue for the three months ended December 31st, 2023, was $88 million, representing year-over-year growth of 2% on a reported basis and 1% on a constant currency basis. For the full year 2023, total revenue was $354.3 million, which represents 6% growth on a reported basis and on a constant currency basis. Bookings, which provides visibility into the year ahead, came in at $402.3 million for the trailing 12-month period ended December 31st, 2023, down 2% year-over-year. Our total company book-to-bill ratio ended the year at 1.14. Bookings as of December 31st, 2023, do not include bookings from Formedix or Applied Biomath. Software revenue was $33.6 million in the fourth quarter, which increased 15% over the prior year period on a reported basis and 14% on a constant currency basis.
The growth in the quarter was driven by biosimulation software and Pinnacle 21. For the full year, software revenue was $131.7 million, up 14% on a reported basis and on a constant currency basis. Ratable and subscription software revenue amounted to 62% of total software revenue for the year, up from 60% in the prior year. Ratable and subscription revenue accounted for 68% of fourth quarter software revenues. Software bookings were $43.3 million in the fourth quarter, which increased 10% from the prior year period. Trailing 12-month software bookings were $136.9 million, also up 10% year-over-year. The software aggregate renewal rate was 85% in the fourth quarter and 88% for the year. I’d like to take a moment and discuss the ARR metric and how it has evolved over the past couple of years.
We had a very strong Q4 software revenue performance, up 15% and on a full year performance, up 14%, despite our ARR being in the mid-80s in the second half of the year and 88% for the full year. As our software business has grown and expanded, particularly with additional features, and the mix conversion to subscription or ratable software revenue, we have found the ARR metric to be less informative of the underlying performance of the business. As we evaluate customer retention and growth in existing customers across the portfolio, the ARR metric is not capturing the performance of the products or business when incorporating the SaaS conversion, Vyasa options, and expanding Pinnacle 21 features, among other initiatives. As a result, we are moving away from ARR as a KPI of the software business internally and will do so externally as well.
For continuity, we will report the ARR on an annual basis going forward. We do believe that the net retention rate, which reflects the existing customer revenue is a better metric to measure the performance of our existing business. In the fourth quarter and for the full year 2023, the net retention rate was 109%, which is consistent with our long-term growth algorithm. The fourth quarter revenue growth of 15% and full year revenue growth of 14% represent healthy performance and contribution from new customers. On a go-forward basis, we intend to provide the software net retention ratio on a quarterly basis. Now, turning to services revenue. which was $54.4 million in the fourth quarter, down 5% versus the prior year on a reported basis and down 6% on a constant currency basis.
For the full year, services revenue was $222.7 million, up 1% on a reported basis and on a constant currency basis. Technology-driven services bookings in the fourth quarter were $75.6 million, which decreased 7% from the prior year period. TTM services bookings were $265.4 million, also down 7% as compared to the prior year. Total cost of revenue for the fourth quarter of 2023 was $34.1 million, an increase from $31.8 million in the fourth quarter of 2022, primarily due to a $2.6 million increase in stock-based compensation, offset by lower outside consulting costs of $0.4 million. Total operating expenses for the fourth quarter of 2023 were $62.4 million, an increase from $43.5 million in the fourth quarter of 2022. The components of operating expenses are as follows; sales and marketing expenses were $8.7 million compared to $7.8 million in the fourth quarter of 2022.
This increase is primarily due to $0.6 million in employee expenses due to the expansion of the sales force and $0.2 million increase in marketing and travel costs. R&D expenses were $8 million compared to $6.6 million in the fourth quarter of 2022. R&D expenses were up primarily due to $2 million in employee-related costs, which were offset by lower stock-based compensation and capital development costs. G&A expenses were $33.6 million compared to $18.3 million for the fourth quarter of 2022. The increase was primarily due to a $12.8 million change in contingent considerations related to the Vyasa acquisition and $1.6 million in acquisition costs, partially offset by a $1.5 million decrease in stock-based compensation. Intangible asset amortization was $11.7 million compared to $10.3 million in the fourth quarter 2022.
Depreciation and amortization expense was $0.4 million, flat with last year. Continuing down the P&L, interest expense was $5.9 million compared to $5.5 million for the fourth quarter of 2022, due to higher interest expense related to the floating portion of our term loan. Miscellaneous income was $2 million compared to an expense of $2.2 million for the fourth quarter of 2022. Income tax expense was $0.1 million, bringing the full year provision to $0.2 million compared to $4 million in the prior full year. Net loss for the fourth quarter of 2023 was $12.5 million compared to net income of $9.2 million in the fourth quarter of 2022. Reported adjusted EBITDA for the fourth quarter of 2023 was $29.6 million compared to $31.9 million for the fourth quarter of 2022.
Adjusted EBITDA margin was 33.6% for the fourth quarter of 2023 and 34.7% for the full year 2023. Reported adjusted net income for the fourth quarter of 2023 was $14.3 million compared to $25.2 million for the fourth quarter of 2022. Diluted loss per share for the fourth quarter of 2023 was $0.08 compared to earnings per share of $0.06 in the fourth quarter of 2022. Adjusted diluted earnings per share for the fourth quarter 2023 was $0.09 compared to $0.16 for the fourth quarter of 2022. Now, moving to the balance sheet. We ended the quarter with $235 million of cash and cash equivalents. As of December 31st, 2023, we had $288.2 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance for full year 2024.
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 per year basis in 2024, and expect an 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 a 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 2023 results, and we look forward to executing our 2024 goals. There’s a lot to be excited about at Certara as we advance biosimulation forward with our software and our technology-enabled services. We will now open the line for questions. Operator, can you open the line?
Operator: Thank you. [Operator Instructions] Our first question comes from the line of David Windley with Jefferies. Your line is open.
David Windley: Hi, good evening. Thanks for taking my questions. I want to ask a couple, circle around revenue and related. On the commercial progress, Bill, you talked about traction in the sales force and seeing a nice uptick in the fourth quarter. I also hear you talking about some of the investments being in that sales force. So, maybe you could talk about what you saw in the quarter that helped the bookings to kind of pick up and meet your expectations? And then where you feel like you need to make those investments to, I guess, further that traction?
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William Feehery: Thanks David. Appreciate the question. So, what you’re referring to is — for everybody, is that earlier in the year, we combined our sales forces across the company into one sales force where we cover both our software and our technology-enabled services. The idea behind doing that was to enable us to offer our clients the full suite of what we have in Certara because after all, for a lot of our — most of our clients are buying multiple products and services from us. So, it’s not really efficient to call on them multiple times. And in fact, as we brought this out, I think the first investment we had to make was in the training of our sales forces, and we had a lot of people who are specialized in certain products or technology-enabled services.
So, as we went through the year, we invested a lot in training. As we go into the fourth quarter, we had people who are able to go into our clients confidently and talk not just about the product they have been known to have been selling all along, but also to be able to say, hey, well, you probably are having a drug at this stage and you want to look at this, and that started to pay off. I’d say that investment in the sales training and just uniting the sales force is probably not fully realized yet. We’re expecting additional gains as we go through this year. We put we were — we had limited ability to do things like change compensation plans in the middle of 2023, where now we’ve kind of put in place a united compensation plans that go into to 2024.
So, that will make more sense. And we’ve got more products that are launching. We’ve got our AI products. We’ve made investments in hiring people that have focused on them. And our goal in general is to kind of up the game in terms of the enterprise sale, taking care of our key accounts and moving up the value chain in terms of how our customers think about us. We did benefit in the fourth quarter, I think, from a pick up a bit in the end markets, and then I think there were quite a number of big customers that had budgets during the year. I think we referred to this earlier, but like halfway through the year, we had clients saying, well, we haven’t cut our budget, but we haven’t spent half of our budget. So, there was a big push on a number of them to kind of catch up to where they wanted to be at the end of the year as well.
So, that was a welcome finish the year after some of the things we’ve seen earlier.
David Windley: Excellent. Okay, great. So, my follow-up then on revenue and revenue guidance, really. You’ve talked, really since the IPO, in terms of leading indicator KPIs and that your trailing 12-month bookings growth is generally a good indicator of forward revenue growth. That bookings number is down a couple of percent. Your guidance is up almost, I guess, midpoint double-digit percent. Maybe two points there. One, how much of the revenue guidance is inorganic from Formedix and Applied Biomath? And then on the organic side, what gives you confidence that you can generate growth out of a trailing bookings number that did not grow? Thanks.
John Gallagher: David, it’s John. Thanks for the question. Yes, in answer to your first question, then, we’re looking at the revenue from that perspective on an organic basis in mid-single-digits. So, 9% to 13% reported organically is mid-single digits, and we feel like that’s a spot that we’re highly confident we can execute against multiple different scenarios or outcomes there. As far as the second part of the question, then, we saw Tier 1 performance due solid — stepping up from Q3 into Q4, we saw Tier 1s perform very well in both software and in services. And so that helped us as we exited the year.
David Windley: Okay. Thank you.
Operator: Thank you. Our next question comes from the line of Michael Ryskin with Bank of America.
Unidentified Analyst: Hi, thanks for taking the questions. This is [Indiscernible] on for Mike. Just picking up on guidance, it looks like your adjusted EBITDA margin outlook for 2024 is a little light considering the sales growth that you’re expecting plus where you finish 2023. You touched on that a little bit in the prepared remarks, but can you give us some color on how we should be thinking about OpEx growth in 2024, and any areas where you might be able to find some additional operating leverage?
John Gallagher: Yes, hi Mike. The couple of key areas that we’re investing in there from a margin perspective that’s leading us to the 31% to 33%. I’d say that R&D is a key investment area for us, especially as we’re looking at software development, we have key investments across the software platforms. I think Simcyp new modules that Bill mentioned, think Phoenix Hosted and then very importantly, think about AI investment. So, that’s one key area where you’ll see the investment come in. And then the other, of course, is around the sales force. So, Bill was talking about the changes that we made on the commercial model that we’re going to expand the sales force, and we’re expecting to be able to increase the call point as we — as that comes through.
So, that’s where you’re going to see it. I think it’s really important to note, though, too, that we’re guiding to the margin of 31% to 33%. We’re committed to growing EBITDA dollars. ,So even though we didn’t really talk about a range there, I think it’s important to note that within that guidance, we’re committed to growing EBITDA dollars on a year-over-year basis.
Unidentified Analyst: Got it. Thank you. Appreciate the color. And then as a follow-up, looks like you logged a pretty sizable adjustment on your — for remeasurement of your consideration for Vyasa. Can you give us some more color on what drove that and kind of what trends are you seeing in that business particularly?
