Simulations Plus, Inc. earnings

Management highlights

- Exceeded top line guidance, with revenue of $24.3 million in Q2, adjusted EBITDA of $8.7 million (36% margin), and adjusted diluted EPS of 35 cents. - Encouraging macro environment with ongoing most favored nation pricing agreements, easing tariff concerns, and supportive funding for customers. Regulatory NAMs guidance was clarified. - AI-related competitive concerns weighed on valuations, but AI is seen as net positive for biosimulation, with the company being an early adopter and embedding AI across product roadmap. - Announced strategic collaboration programs with three large pharmaceutical companies to advance AI workflows. - Assessing software renewal rates and reorganizing sales team to regional account-based model. - Services backlog increased 18% to $24 million. - Effective tax rate for fiscal 2026 expected to be between 23% - 25% vs previous 12% - 14%.

Guidance

- Total revenue for fiscal 2026 between $79 - $82 million, year-over-year growth 0 - 4%. - Software mix 57 - 62%. - Adjusted EBITDA margin 26 - 30%. - Adjusted diluted EPS expected to range 75 cents - 85 cents. - Third quarter 2026 revenue anticipated $20 - $22 million, adjusted EBITDA margin 27% - 33%, adjusted diluted EPS $0.20 - $0.27.

Segment performance

Second quarter revenue was $24.3 million. Software revenue increased 9% to represent 60% of total revenue, with discovery revenue (e.g., AdMet Predictor) up 19% for the quarter and 6% for trailing 12 months (19% of total software revenue in the quarter), development revenue (e.g., GastroPlus and Monolix Suite) up 12% for the quarter and 3% for trailing 12 months (78% of total software revenue for both quarter and trailing 12 months), and clinical operations revenue (primarily from proficiency) down 54% for the quarter and 58% for trailing 12 months (3% of total software revenue for both). Services revenue increased 8% to represent 40% of total revenue, with development services (biosimulation) up 12% for the quarter and down 3% for trailing 12 months (77% of total services revenue), and commercialization services (MedCom services) down 1% for the quarter and up 66% for trailing 12 months (23% of total services revenue). Total gross margin was 66%, with software gross margin 89% and services gross margin 33%.

Risks & headwinds

- Macro environment and pharma-related scenarios could be fragile, affecting business. - AI-related competitive concerns initially weighed on valuations. - Software renewal rates have seen churn, particularly with certain commercial pharma and pre-commercial biotech, related to episodic vs recurring demand and challenging early stage biopharma market. - Effective tax rate change and related items could impact financials. - External announcements and macro issues can affect the business.

Analyst Q&A

• Q: Dive into the three large pharma collaborations, how they work, contract details, cross-selling.

  A: Collaborations have been underway, focus on matching AI development to pharma needs, financial components in discussion.

• Q: New logos, are they new customers or competitive conversions?

  A: New logos are non-existing customers taking down solutions for the first time, some may be moving from competitive scenarios.

• Q: Sequential uptick in commercial services backlog, proficiency pipeline, seasonality.

  A: Backlog driven by service revenue, proficiency performance has stabilized, reasonable growth expected.

• Q: Upsell opportunities, where is the biggest opportunity?

  A: Opportunity exists at all levels, from single to multiple product customers, driven by organizational and product roadmap changes.

• Q: Mid-year relative to initial guide, conservatism.

  A: Operating in fragile environment, cautious approach, momentum building but not taking up guide yet.

• Q: Momentum from macro vs NAMs.

  A: Broad-based momentum, support from regulatory and client AI investment shifts.

• Q: Cross-sell beyond modeling department.

  A: Proficiency acquisition opened reach into clinical trial budgets, AI budgets in clients offer new opportunities.

• Q: AI monetization timing.

  A: Discussions ongoing, recognition of value there, mechanics of monetization in discussion, not significant in fiscal 2026, likely contributor in fiscal 2027.

• Q: Large AI companies as clients.

  A: Historical revenue from some AI companies, discovery platform AdMet Predictor and scientific engines like GastroPlus and Monolix are of value.

• Q: Services metrics, projects vs backlog.

  A: Projects can ebb and flow, backlog growth is good measure of pipeline.

• Q: Software segment breakdown shifts.

  A: Development solutions like Monolix and GastroPlus are key, Monolix could grow faster in percentage growth.