Certara, Inc. Q3 FY2025 earnings call

• Team executed against 2025 goals, third quarter revenue $104.6M in line with expectations, 10% Y/Y growth. Adjusted EBITDA $35.2M, margin 34%. • R&D up 24% Y/Y, 10% of revenue. Bookings $96.6M below expectations, 1% growth. • Narrowed revenue guidance to $415M-$420M. Raised adjusted EBITDA and EPS guidance. • New product launches: Pinnacle 21 Enterprise, Phoenix Cloud, CertaraIQ. • Regulatory services strategic review ongoing. • QSP services growing, becoming important part of business.

Software: Bookings of $40.8 million represented growth of 17%. Software revenue was $43.8 million, growing 22% reported and 6% organically. Services: Bookings of $55.8 million declined 9% reported. Services revenue was $60.8 million, growing 3% reported and 3% organically. Software bookings were $40.8M (+17%), software revenue $43.8M (+22% reported, +6% organic). Services bookings $55.8M (-9%), services revenue $60.8M (+3% reported, +3% organic).

• Narrowed revenue guidance to $415 million to $420 million. • Raised adjusted EBITDA margin guidance to high end of previous range. • Raised adjusted EPS guidance. • Chemaxon expected to contribute software revenue of $23 million to $25 million. • Tax rate expected in range of 25% to 30%.

• Cautious spending behavior among Tier 1 services customers, some pushing deal timelines. • Regulatory writing performance inconsistent. • Potential impact of government shutdown on FDA interactions, but not expected to significantly affect the year.

Q: Just wanted to ask a little bit on the Tier 1 services revenue or bookings dynamic in the quarter. When did you start to see a slowdown in decision-making timing? And of the potential deals that got pushed, how are you kind of thinking about that split at this point?

A: As it relates to the bookings, it was our Tier 1 services customers where we saw delays. Hesitancy to slowness in decision-making. Through the month of October, we continue to see some deceleration in Tier 1 services bookings related to these larger customers of ours. And as a result of that, we're expecting it to continue in Q4.

Q: Hopefully, you can hear me. I'm in the car. I was hoping you could comment or disentangle the gross profit outperformance between mix and perhaps efficiency, productivity?

A: On the gross margin line, we've seen some productivity, especially compared to last year. The software business has a higher gross profit than services. So not only are we getting productivity on the cost of sales side when we look at services, but the mix shift towards software is also a tailwind to the gross profit.

Q: I was going to make my next question, my second question about your areas of innovation, but it does end up being somewhat related. So think you talked about CertaraIQ is your more AI-enabled QSP and Phoenix Cloud launches. It sounds like those have been well received. The comment in the prepared about QSP being your fastest-growing area, maybe you could also drill into that because I think today, most of QSP is service-driven, but you're launching this, what I think sounds like a more technology or software-driven QSP. And how do you expect that to evolve? And does that growth in QSP mix kind of reverse the software mix until the technology -- the software picks up a little bit more. I'm just curious how the QSP feathers into that since you highlighted its growth.

A: We are executing the strategy that we set out to do when we acquired Applied BioMath about whatever it was, about 2 years ago, which was to take QSP and to bring a software platform to it, and that is CertaraIQ, which we launched. There's a huge demand for QSP. Some of it has to do with the recognition that this type of modeling has been quite useful now that the FDA has made its announcement on NAMs and on reducing the number of nonhuman primates. And some of it has to do with the growth in biotech or in large molecules where QSP has been particularly valuable. We're attempting, and I think we will very much succeed with this product to create a standard product that QSP modelers use not just within pharma companies, but also as they go forward and submit their models for approvals to regulators. There's a big need in the market for this, and there's a big opportunity to make QSP a lot more widespread by improving the efficiency of modeling, which we can do with AI and providing a platform where our consultants are much more efficient, providing the same platform so that our pharma customers are using the same platform internally and can also drive that kind of same efficiency, and we can get work going back and forth. And then finally, this is an opportunity for us to create foundational models in particular therapeutic or drug modalities that we can sell over and over again using this software platform. So there's multiple ways that this will benefit the company financially as we go forward. There's nothing like it really on the QSP market. There's obviously modeling tools out there, but we believe this is a significant advance. It's been well received. We only launched it a couple of weeks ago. So it's a bit early to talk about the financial success, obviously, but we expect as we go into 2026, this will be a success for the company.

Q: I recognize that there's some challenges or hesitancy with your Tier 1 customers. I'm just curious if you've heard or seen any change since we got a little bit of clarity on the most favored nation pricing and what that could mean, some clarity on the tariffs and what that impact could be. I mean we've heard from a few other companies that post some of those initial most favored nation type contracts or changes that pharma was kind of reengaging. Is that similar to what you're seeing? Or any color along those lines?

A: We have also heard other companies talking about that and heard some discussion among customers. So I would say that we're cautiously optimistic that's a pretty recent development. So we need to see that kind of get out in the marketplace. But I think any sign of kind of the macro stability for the Tier 1 customers and the -- and what's going on with pricing, I think, would be ultimately good for us and will flow into hopefully a better environment as we go into 2026.

Q: I just wanted to follow up on some of the earlier questions related to the software business a little bit more. And this is frankly something we're just asked by investors a fair amount. But I guess we're obviously seeing pharma and some of those Tier 1 customers invest a lot more internally in some of their own AI plus capabilities. And I guess, do you kind of feel that's net-net headwinds, tailwinds, maybe a wash to where you guys come out? Just trying to understand like to what extent as they build out those capabilities, they turn to you all to help make sure that those internal processes are ramping as they should? Or is it kind of an or rather than an and within their budgets just based on your conversations?

A: What we've seen happen with AI has been tremendous. This is starting more than a year ago, a tremendous excitement and willingness to try things in pharma, but somewhat of a hesitancy to commit to enterprise sales until they understood the full implications of putting AI in terms of data security and how the products will be used, sort of the, let's call it, the quality controls that you need to put in around AI and some of these uses. So we saw a lot of -- in the beginning, there were really great marketing opportunities, but slow to sell. And as we've gotten through 2025, we've seen somewhat of a pickup in actual sales of the pure AI products. All of our products that we've recently launched, well, let's say, Phoenix and CertaraIQ have embedded AI in them, and that's been quite well received. And I think we're seeing a bit more willingness to move faster to put these things in as you deploy them across the enterprise. You're asking a somewhat different question also around is pharma considering building our core products using AI internally versus buying them from us. The core modeling technologies we have are really quite specialized. And so we're -- that doesn't tend to be a real option. And you can see that with our software, which is still growing quite nicely, and we expect will continue to be strong as we go into 2026.

Q: Just to go back a couple of questions ago, you mentioned the prospect of stabilized environment for 2026. What do you think stabilized means for Certara growth potential at this point? And I just ask as the last 3 years have obviously seen a lot of macro turbulence, Organic growth has averaged 3% to 4% over that stretch of time. Is stabilized supportive of mid- to high single-digit growth and robust gets you back to the double digits? Or any way directionally, just appreciating kind of what the company has been through over recent history?

A: As it relates to us calling it stabilized, and really, what we're saying is we see continued performance on the software side, which has been playing out according to plan this year. So year-to-date software bookings have been 7% on a TTM basis. And then we're seeing -- or 6% year-to-date, 7% TPM and then 6% organic software this year. And then we're adding the products that Bill was talking about, of course, too. So those are the positives. The headwind to all that is what we're seeing in services right now. And we saw it -- you can see it in the Q3 results. But you can also see it -- we saw it in October. And that's why we were indicating that as we look towards the end of the year this year, we're not really expecting to see the same level of seasonality that we've seen over prior years. And so that's going to provide a bit lower of a jumping off point as it relates to services. So services is likely to be in the low single digits as we approach next year as a result of that. So software going well, playing out according to plan. We've got new products, but services is the spot that we're keeping our eye on as we finish '26.

Q: I was wondering, I know you guys talked about Tier 1 and some of the macros that they're facing. I was wondering if you could talk to Tier 2 and Tier 3, acknowledging that they make up a smaller portion of the revenue, but is it any different in terms of some of the macro headwinds that Tier 1s are facing?

A: That's a bright spot for us actually. So Tier 3, both Tier 2 and Tier 3 services have had good growth throughout the year. And in fact, in Q3, we saw double-digit growth in biosim services Tier 3. So this has been a partial offset to the headwinds that we've been describing in Tier 1 has been the positive growth and momentum that we have in Tier 2 and most notably in Tier 3.

Q: I was wondering if there was any type of waterfall implications with the government shutdown regarding -- for FDA or any of the agencies you guys work with?

A: It's I guess the question revolves around how long it lasts. I think most people in the pharmaceutical industry believe that this will resolve itself at some point and that point will be less time than causes serious issues. It goes on for a really long time, and we have a big slowdown in drug approvals or something, that's one thing, but I don't think that, that's really what people believe. There's a little bit of slowdown in terms of any kind of contracting with the government, but we don't expect that will have a significant effect on the year.