Certara, Inc. Q3 FY2024 earnings call

• Third quarter revenue increased 11% to $94.8 million and total bookings rose 13% to $96.1 million.
• Closed the Chemaxon transaction to expand biosimulation reach into the preclinical market.
• Biosimulation services achieved higher utilization, driving EBITDA margin improvement, but larger customers had lengthened decision-making processes.
• Regulatory services market was more challenging than expected, leading to guidance revision.
• Invested in software R&D to integrate AI/ml, launch Certara Cloud, and acquire Chemaxon. AI capabilities expanded via Vyasa transaction, CoAuthor product successful.
• Built out sales and marketing infrastructure, growing commercial team and integrating Chemaxon team members.
• Launched Phoenix version 8.5, Simcyp Consortium event, and QSP collaboration with Ichnos Glenmark Innovation published in Nature Cancer.

For the third quarter of 2024, total revenue was $94.8 million, up 11% YOY. Software revenue was $35.9 million, up 15% YOY on a reported basis, with ratable and subscription revenue accounting for 72% of third-quarter software revenues, up from 68% in the prior year period. Software bookings were $34.8 million, up 28% YOY, and trailing 12-month software bookings were $153 million, up 15% YOY with a net retention rate of 108%. Services revenue was $58.9 million, up 9% YOY. Technology-driven services bookings were $61.3 million, up 6% YOY, but trailing 12-month services bookings were down 1% YOY. There was divergence between regulatory and biosimulation services, with biosimulation services showing acceleration and regulatory services weakening.

• Revised 2024 guidance: total revenue expected $380-385 million (7-9% growth), revenue growth excluding Chemaxon 6-7%, adjusted EBITDA $120-124 million, adjusted EPS $0.41-0.44, fully diluted shares 160-162 million, tax rate 25-30%.

• Lengthened decision-making process among larger customers and more discreet engagements.
• Regulatory services market challenges relative to expectations.
• Begun review process for regulatory services business to consider long-term strategic options.

Q: Flush out the demand environment, intersection with end-of-year budget flush and go-to-market strategies.

A: William Feehery says there will be some budget flush in Q4, benefiting from commercial team investment, market conditions healthier than earlier, biotech funding modestly up, Tier 1 customers looking better but not huge change.

Q: Chemaxon acquisition revenue and margin.

A: John Gallagher states $5 million expected in Q4, ~90% software, margin below legacy but expected to align with corporate average by 2025.

Q: Improvements with Tier 1 customers from 2Q to 3Q.

A: John Gallagher says Tier 1 showed stability moving from Q2, software performance strong across tiers, Biosim services improved in Q3 offset by regulatory services Tier 1 contraction.

Q: FY’25 demand from Tier 1 and smaller biotech.

A: William Feehery says sales pipeline healthy but project close times lengthening, John Gallagher mentions revision takes out seasonality due to end market challenges.

Q: Reallocation of resources from services to software and conversion.

A: John Gallagher says software net retention rate 110% YTD, strong software performance correlated with Biosim services, services performance mixed with Biosim up and regulatory down.

Q: Uniqueness and demand for biosimulation.

A: William Feehery says sustained investment in biosimulation product suite, favored by regulatory agencies, lower cost than clinical trials driving interest.

Q: Exposure to small vs large molecule drug development.

A: William Feehery says footprint reflects pharma work, tools have features for both small and large molecules.

Q: M&A contribution to segments.

A: John Gallagher says reported total revenue growth 11% with organic 6%, software organic 10% vs reported 15%, services organic 3% vs reported 9%, bookings organic 7% vs reported 13%, software bookings strong across tiers.