Simulations Plus, Inc. Q3 FY2025 earnings call

• Third quarter revenue slightly above preliminary range, organic revenue down 4% due to lower QSP/QST software and biosimulation services revenue. Diluted EPS loss was $3.35 including $77.2 million noncash impairment expense, adjusted diluted EPS was $0.45, adjusted EBITDA was $7.4 million or 37% of revenue.
• Pro-ficiency acquisition's training platform and Medical Communication services impacted by market headwinds, revenue outlook for fiscal '25 and '26 decreased, and assets were impaired.
• Software business: ADMET Predictor grew 8%, GastroPlus 4%, MonolixSuite 3%, QSP/QST down 39%. Service business: Services revenue impacted by market volatility, bookings slowed, some projects delayed, and a client cancellation impacted near $2 million revenue.
• Implemented strategic reorganization from business unit structure to functionally driven operating model, made key leadership appointments to enhance client engagement and sales/marketing capabilities, streamlining operations and fostering collaboration.

Third quarter revenue was $20.4 million, up 10% including a $2.4 million contribution from the Pro-ficiency acquisition. Organic revenue declined 4% mainly due to lower QSP/QST software revenue and biosimulation services revenue. Software revenue grew 6%, representing 62% of total revenue. GastroPlus was 56% of software revenue for the quarter, ADMET Predictor was 20%, MonolixSuite was 17%, Pro-ficiency was 3% and QSP/QST products were 4%. For trailing 12 months, GastroPlus was 48%, MonolixSuite was 20%, ADMET Predictor was 17%, Pro-ficiency was 9% and QSP/QST products were 6%. Services revenue grew 17%, representing 38% of total revenue. PK/PD services were 38% of services revenue for the quarter, Med Comm services were 26%, QSP/QST services were 19% and PBPK services were 18%. For trailing 12 months, PK/PD services were 37%, QSP/QST services were 24%, Med Comm services were 22% and PBPK services were 17%. Total gross margin was 64% for the quarter, with software gross margin 80% and services gross margin 38%.

• Revised fiscal 2025 total revenue expectation between $76 million to $80 million, Pro-ficiency contribution between $9 million to $12 million, year-over-year revenue growth 9% to 14%, software mix 55% to 60%, adjusted EBITDA margin 23% to 27%, adjusted diluted EPS $0.93 to $1.06.
• Anticipate modest improvement in fiscal 2026 compared to 2025, with flat organic revenue growth, software revenue growth 5% to 9%, and services revenue decline 9% to 13%.

• Biopharma market headwinds: patent expirations, Inflation Reduction Act pricing pressures, capital pullback, tariff threat, NIH and FDA budget reductions leading to uncertainty and constrained spending.
• Service bookings and project delays: Third quarter services bookings slowed, some contracted projects delayed, and client cancellations impacted revenue.
• Impairment risk: Assets like Pro-ficiency were impaired due to market conditions.

Q: What is driving the margin erosion in the fourth quarter?

A: The reorganization and expense structure actions mainly impact future, fourth quarter revenue decline affects margins, bringing adjusted EBITDA margin to mid-to-high 20% range.

Q: What's the reason for the drop in software renewal rates?

A: Mainly client consolidations, site closures, etc. for some products, but long-term expectation is to maintain 90% - 95% renewal rate on fees.

Q: What's the impact of FDA's April 10 guidance?

A: Announcement is specific to early preclinical translational activities, long-term positive, but short-term impact on revenue is not quick.

Q: How were service bookings in the quarter?

A: Backlog is up year-over-year, but there are delays in project initiation from backlog accounts with prolonged time to project start.

Q: What about R&D investment related to AI?

A: Opportunities abound with AI initiatives, but R&D expenditure will be a balance between EBITDA improvement and R&D needs.

Q: What's the financial expectation for Pro-ficiency in FY '25?

A: Pro-ficiency contributes $9 million to $12 million in 2025, impacted by market headwinds but related projects have initiated.