Certara, Inc.

Good day and thank you for standing by. Welcome to the Certara first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1 1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Zeichler, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Sartara, we have William Ferry, Chief Executive Officer, and John Gallagher, Chief Financial Officer. Earlier today, Sartara released financial results for the quarter ended March 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 the forward-looking statements. Please refer to slide two in the accompanying 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 release available on the company's website. For additional information, please refer to the reconciliation tables in the accompanying materials. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 8, 2023. Sertara 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.

Thank you, David. Good afternoon, everyone. Thank you for joining Sartara's first quarter 2023 earnings call. John and I will start with prepared remarks, and then we will take your questions. We are pleased with our start to 2023, which positions us well for the remainder of this year and beyond. Our team is focused on executing Sartara's mission to accelerate medicines to patients using biosimulation software and services. We continue to see expanded interest from customers looking to safely accelerate the drug development process through the use of biostimulation. We deliver information and analysis that informs critical decision making that will lower the cost of development and increase the probability of success in clinical trials, ultimately improving the health and well-being of millions of people globally. Before discussing our first quarter results, I'd like to formally welcome John Gallagher as Sertara's new CFO. John joined Sertara a little over a month ago and has already been a valuable addition to the leadership team. John will play an important role in Sertara's future growth and financial success, and I'm thrilled to have him on board. There's a lot to be excited about at Sertara as the pace of adoption and awareness of Sertara's biosimulation platform continues to expand around the world. Just a few weeks ago, we announced that Sertara's SimSys PVPK simulator has now been used to inform more than 300 drug label claims for over 100 novel drugs in lieu of conducting clinical studies. In addition, in 2022 and for the ninth consecutive year, we're proud to say that 90% of U.S. FDA new drug approvals were received by Sotara's customers who use our biosimulation software and technology-driven services. Shifting to our first quarter performance, we are pleased with our financial results, which met our revenue and profitability expectations for the quarter. Sitara's total revenue of $90.3 million grew by 11% year-over-year on a reported basis and 13% on a constant currency basis. Revenue growth was driven by software and biosimulation services, as we continue to see strong demand across all customer categories. First quarter software revenue of $33 million represented 13% year-over-year growth on a recorded basis and 16% on a constant currency basis. We continue to see strong performance from our core BI simulation software, SimCyp and Phoenix, as well as Pinnacle 21. These three software platforms represent the majority of our software revenues. In early March, we announced our annual update of SimCyp, now on version 22. This year, we added the ability to model more diverse populations, expanded our library of therapeutic compounds, and unveiled 10-step designer, a tool that will help users develop their own pharmacodynamic and QSP models. Our continued investment and commitment to innovating our core software platforms with new features to support and expand use cases is what continues to strengthen our relationships with our pharmaceutical and biotech customers. Following the close of the Vyasa transaction, our team has worked hard to integrate their cutting edge deep learning AI technology throughout the Sitara platform. We recently announced the rollout of our updated D360 software, which incorporates AI and enables the development of predictive models that are trained on both public and proprietary data. These enhanced D360 capabilities include automated property prediction, novel chemical structure generation, and analysis of unstructured data. We're excited by the speed at which our software team was able to make these upgrades, and we're encouraged by the early traction with customers. Throughout the year, our team will continue to find new applications for this deep learning technology across our software product offerings. So, Tara's first quarter technology driven services revenue was $57.3 million. which grew 9% on a reported basis and 11% on a constant currency basis compared with the first quarter of 2022. Biostimulation services growth remained an area of strength, growing at comparable levels experienced throughout 2022, and we expect continued strength throughout 2023 due to an encouraging bookings trend throughout the past 12 months. We continue to see strong demand for biosimulation services as our clients expand its use across biologics, cell and gene therapies, and small molecules. Our regulatory businesses continues to be a headwind to services growth, but they are performing within the range of our expectations as we navigate a challenging market environment. The pace of recovery in regulatory is moving slower than initially anticipated, and growth is expected to be weighted more towards the second half of the year. Our regulatory team is focused on strengthening the pipeline, and we remain encouraged by the progress made so far. To close, we're pleased with our first quarter results. We believe that our team is well-positioned to continue our success throughout 2023 and over the long term as we support and catalyze the adoption of biostimulation for drug research and development. I would like to close my remarks by extending my deepest appreciation to the entire organization of Certara for their dedication and hard work. I will now turn it over to our CFO, John Gallagher, to discuss our first quarter financial results in more detail. Thank you, William. Hello, everyone. Before reviewing our financial results, I would like to thank William and the entire team at Certara for the opportunity to join such an exciting and innovative company. Andy has been helpful to me as we work our way through an orderly transition of responsibilities, which is expected to be completed later this quarter. Moving to our financial results, total revenue for the three months ended March 31, 2023, with $90.3 million, representing year-over-year growth of 11% on a reported basis and 13% on a constant currency basis. As discussed, overall demand for biosimulation remains strong and thus insulated from concerns in the industry around funding. Specifically, we recently performed an analysis of our accounts receivables for 2022 and found that less than 1% of our total revenues were transferred through banks, typically associated with venture or early-stage companies. Software revenue was $33 million in the first quarter, which increased 13% over the prior year period on a reported basis and 16% on a constant currency basis. Growth in the quarter was driven by biosimulation software and Pinnacle 21. Rattable and subscription revenue accounted for 59% of first quarter software revenue. Software bookings were $30.7 million in the first quarter, which increased 4% from the prior year period. We experienced timing-related delays that pushed some first quarter deals into the second quarter. There has been no impact to our annual plan due to this timing. The overall health of our software bookings remained strong, and trailing 12-month software bookings were $126.1 million, up 24% year over year. The software aggregate renewal rate was 90% in the first quarter, which is in line with our plan. Services revenue was $57.3 million in the first quarter, which increased 9% over the prior year period on a reported basis and 11% on a constant currency basis. Biosimulation services continued to perform well, growing in the mid to high teens range, while regulatory services remains a headwind to the overall growth rate. Technology-driven services bookings for the first quarter were $82 million, which increased 4% from the prior year period. Trailing 12-month services bookings were $287 million, which increased 8% as compared to the prior year. Biosimulation services booking momentum continued to be robust and an encouraging indicator for the adoption of biosimulation. In addition, We are focused on improving our regulatory services performance against the difficult market backdrop. Regulatory remains a high priority for our commercial team, and we're focused on strengthening our business pipeline in 2023. Total cost of revenue for the first quarter of 2023 was $34.9 million, an increase from $32.8 million in the first quarter of 2022. primarily due to employee costs related to billable headcount growth as well as software licenses. Total operating expenses for the first quarter of 2023 were $48 million, an increase from $42.6 million in the first quarter of 2022. The components of operating expenses are as follows. Sales and marketing expenses were $8 million compared to $6.1 million for the first quarter of 2022. This increase is primarily due to employee costs related to expanding the sales and marketing team. R&D expenses were $9.3 million compared to $7.5 million for the first quarter of 2022. R&D expenses were up primarily due to employee-related costs for software development. G&A expenses were $19.8 million compared to $18.3 million for the first quarter of 2022. Excluding the impact of acquisition expenses, including a change in fair value estimate for contingent consideration, G&A was flat year over year. Intangible asset amortization was $10.5 million compared to $10.1 million in the first quarter of 2022. Depreciation and amortization expense was $0.4 million compared to $0.5 million in the first quarter of 2022. Continuing down the P&L, interest expense was $5.5 million compared to $3.2 million for the first quarter of 2022 due to higher interest expense relating to our floating rate term loan. As a reminder, we have about 78% of our debt fixed at 6.38%, and roughly 22% floating at LIBOR plus 350, which is about 8.5% at today's rate. Miscellaneous income was a half a million dollars compared to $0.8 million in the first quarter of 2022 due to higher interest income offset by foreign currency expenses. Income tax expense was $1.1 million compared to $1.5 million for the first quarter of 2022. Net income for the first quarter of 2023 was $1.4 million, compared to $2.2 million for the first quarter of 2022. Reported adjusted EBITDA for the first quarter of 2023 was $32.3 million, compared to $27.7 million for the first quarter of 2022, representing 17% growth. Adjusted EBITDA margin was 36% in the first quarter of 2023. Recorded adjusted net income for the first quarter of 2023 was $19.3 million compared to $16.9 million for the first quarter of 2022. Diluted earnings per share was one penny in the first quarter of both 2023 and 2022. Adjusted diluted earnings per share for the first quarter of 2023 was $0.12 compared to $0.11 for the first quarter of 2022. Now moving to the balance sheet, we ended the quarter with $244.1 million of cash and cash equivalents. As of March 31, 2023, we had $296.7 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance for full year 2023, we are reiterating our previously issued guidance of total revenue in the range of $370 to $385 million, representing growth of 10 to 15% compared with 2022. Our revenue guidance assumes continued strength in software and biosimulation services, where we have good visibility given our trailing 12-month bookings. The guidance also assumes regulatory services growth in the low single digits as compared to 2022, which is expected to be more second-half weighted than originally anticipated, and software subscription revenue continues to increase as a percentage of total software revenues. We expect adjusted EBITDA in the range of $131 to $137 million. adjusted EPS in the range of $0.50 to $0.55 per share, fully diluted shares in the range of $159 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 Ferry, for closing remarks. Thank you, John. To summarize our message today, we're pleased with our first quarter results. And we believe that Sertara is well positioned for growth this year and in the future as we continue as a global leader in biosimulation. We will now open the line for questions. Operator, can you open the line?