Certara, Inc.

Hello, and thank you for standing by. Welcome to SATAR fourth quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. I would now like to hand the conference over to David Daigler, Head of Investor Relations. Sir, you may begin.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Sertara, we have William Ferry, Chief Executive Officer, and John Gallagher, Chief Financial Officer. Earlier today, Sertara released financial results for the quarter ended December 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 response 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 press release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. The conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 29th, 2024. CTAR disclaims any obligation except as required by law to update or revise any financial projections or forward-looking statements, whether it be against 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 CTAR's fourth quarter and full-year earnings call. John and I will start with prepared remarks, and then we will take your questions. We are pleased to finish the year with a solid fourth quarter performance in both software and in technology-enabled services. 2023 presented our industry with many challenges, as pharmaceutical and biotech customers were conservative in their spending amidst macroeconomic and geopolitical pressures. Our full year reported revenue growth was 6%. in line with the guidance we gave in August. This revenue growth included 14% growth in software and 1% in technology-enabled services. We had record software sales in the fourth quarter, and we were encouraged to see our technology-enabled services bookings pick up in the second half of 2023. Tatara's goal is to enable model-informed drug development, or MIDD, in the global biopharmaceutical industry. MIDD is an approach that utilizes biological and statistical models derived from preclinical and clinical data to inform decision-making in drug development and commercialization. Biosimulation is a critical component of MIDD that uses computer-aided mathematical simulation of biological processes and systems to understand the action of a drug in a human body or in a population of humans. Tatara enables our customers to use biosimulation and MIDD to increase the probability of success in bringing a new drug to market and to decrease the cost of drug development. We have an extensive and expanding list of customers within the biopharmaceutical industry, which expanded in 2023 to a count of 2,395. Within this customer base as of December 31st, 2023, we had 389 customers with an annual contract value of more than $100,000, representing growth of 5% year over year. We also had 63 customers with an annual contract value of more than $1 million, up 11% from 2022. During the second half of 2023, we reorganized our commercial infrastructure to better sell our end-to-end solutions, and the team delivered improved results in both software and services throughout the second half. With our new enterprise sales approach, we have effectively captured cross-selling opportunities, leading to expanded relationships with some of our top customers. I am very happy with the progress our team has made so far, and I'm confident that these improvements will support our commercial initiatives in the coming years. Our software business growth of 14% in 2023 was driven by our SimSip, Phoenix, and Pinnacle 21 platforms. We have been investing in these products to add new features, a number of which launched during 2023 and will continue to increase traction as we move into 2024. Some of the highlights in 2023 included the 22nd version of our SimSip PVPK simulator, which included several upgrades to our modeling and simulation capabilities. We also launched SimCit Biopharmaceuticals, a new module designed to aid drug formulation and expand our presence in the early stages of drug development. Following the acquisition of Viasa last January, we began to integrate AI and machine learning across our portfolio. An early example was the release of an updated version of D360, which featured deep learning models for novel chemical structure generation and automated property predictions. We also launched CoAuthor, a new regulatory writing tool that uses generative AI to aid in the drafting of regulatory submissions. Customer feedback on our AI products has been encouraging and drove customer interest in the second half of the year. Looking ahead to 2024, we will continue to invest in our software platform. One key area of focus is our clinical data strategy. Last fall, we augmented the Pinnacle 21 data exchange with the acquisition of Formetics, a provider of data standardization and automation software. With Formetics, Sitara will bring increased efficiency to clinical trial data management via an end-to-end solution. In addition to Pinnacle 21, we also plan to invest in other areas, such as new models for biosimulation, new products and product features, and additional integration of AI across the platform. As biostimulation becomes more widespread, we are broadening the range of our offerings to support additional use cases in therapeutic areas. I am confident that these investments will create new opportunities to grow our platform on a global scale and penetrate deeper into our customers' R&D organizations. Our technology-enabled services business overcame market headwinds to deliver solid performance in the second half of 2023. In August, we announced the consolidation of our biosimulation services and regulatory services teams in order to better deliver all of Sertara's capabilities to our customers' projects. Thus far, we are pleased with the improved execution in the services business, which is performing better as a combined organization. Across our technology-enabled services group, We saw a pickup in new business activity, which led to sequential bookings growth in the fourth quarter. Customers of all sizes continue to recognize the value that Sitara services can add to their modeling, simulation, and regulatory projects. We look forward to building on this momentum in 2024. As a leader of biosimulation, expanding into emerging methods of modeling and simulation is a key component of our business strategy. In December, we announced the acquisition of Applied Biomath, a leading provider of QSP services. QSP, or Quantitative Systems Pharmacology, combines computationally modeling and experimental data to simulate how the body will respond to a drug. QSP is at the cutting edge of biosimulation approaches and has vast potential to improve the biopharmaceutical R&D and inform decision-making across the drug development process. Along with proprietary software, Applied Biomath brings a complimentary customer base, which includes clients in the discovery and preclinical stages of development. By combining the Applied Biomath and Sertara QSP teams, we are proud to have the largest QSP services group in the drug development industry. In 2023, we continue to invest in our business and expand our team worldwide. We prioritized hiring leading scientists and subject matter experts to support our growth. As of the end of 2023, we had about 1,400 employees, including more than 400 employees with doctorate degrees. We believe we are the employee of choice in the biosimulation industry, and we offer a strong culture and commitment to innovation. We believe there's an opportunity for us to accelerate some investments in 2024 across our organization. In particular, we intend to invest in the development of software capabilities, including AI, as well as expand our commercial organization, including key account management positions. These investments will start to yield minor benefits in 2024, but will be most impactful in 2025 and 2026. In closing, we are pleased with our 2023 results. The growth opportunity in biosimulation continues to strengthen as drug developers look to maximize capital efficiency and reduce pipeline risk. I am confident that the secular adoption of biosimulation, our improved commercial execution, and the investments we are making in our products and our team will support strong growth in 2024 and beyond. I will now turn it over to our CFO, John Gallagher, to discuss our fourth quarter and full year financial results in more detail.

Thank you, William. Hello, everyone.

Total revenue for the three months ended December 31st, 2023, was $88 million, representing year-over-year growth of 2% on a reported basis and 1% on a constant currency basis. For the full year 2023, total revenue was $354.3 million, which represents 6% growth on a reported basis and on a constant currency basis. Bookings, which provide visibility into the year ahead, came in at $402.3 million for the trailing 12-month period ended December 31, 2023, down 2% year over year. Our total company book-to-bill ratio ended the year at 1.14. Bookings as of December 31, 2023 do not include bookings from Formatix or Applied Biomass. Software revenue was $33.6 million in the fourth quarter, which increased 15% over the prior year period on a reported basis and 14% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. For the full year, software revenue was $131.7 million, up 14% on a reported basis and on a constant currency basis. Rattable and subscription software revenue amounted to 62% of total software revenue for the year, up from 60% in the prior year. Routable and subscription revenue accounted for 68% of fourth quarter software revenues. Software bookings were $43.3 million in the fourth quarter, which increased 10% from the prior year period. Trailing 12-month software bookings were $136.9 million, also up 10% year over year. The software aggregate renewal rate was 85% in the fourth quarter and 88% for the year. I'd like to take a moment and discuss the ARR metric and how it has evolved over the past couple of years. We had a very strong Q4 software revenue performance, up 15%, and on a full year performance, up 14%. Despite our ARR being in the mid-80s in the second half of the year, and 88% for the full year. As our software business has grown and expanded, particularly with additional features and the mixed conversion to subscription or ratable software revenue, we have found the ARR metric to be less informative of the underlying performance of the business. As we evaluate customer retention and growth in existing customers across the portfolio, The ARR metric is not capturing the performance of the products or business when incorporating the SAS conversion, Viasa options, and expanding Pinnacle 21 features, among other initiatives. As a result, we are moving away from ARR as a KPI of the software business internally, and we'll do so externally as well. For continuity, we will report the ARR on an annual basis going forward. We do believe that the net retention rate, which reflects the existing customer revenue, is a better metric to measure the performance of our existing business. In the fourth quarter and for the full year 2023, the net retention rate was 109%, which is consistent with our long-term growth algorithm. The fourth quarter revenue growth of 15% and full year revenue growth of 14% represent healthy performance and contribution from new customers. On a go-forward basis, we intend to provide the software net retention ratio on a quarterly basis. Now, turning to services revenue, which was $54.4 million in the fourth quarter, down 5% versus the prior year on a reported basis, and down 6% on a constant currency basis. For the full year, services revenue was $222.7 million, up 1% on a reported basis and on a constant currency basis. Technology-driven services bookings in the fourth quarter were $75.6 million, which decreased 7% from the prior year period. TTM services bookings were $265.4 million, also down 7% as compared to the prior year. Total cost of revenue for the fourth quarter of 2023 was $34.1 million, an increase from $31.8 million in the fourth quarter of 2022, primarily due to a $2.6 million increase in stock-based compensation, offset by lower outside consulting costs of $0.4 million. Total operating expenses for the fourth quarter of 2023 were $62.4 million, an increase from $43.5 million in the fourth quarter of 2022. The components of operating expenses are as follows. Sales and marketing expenses were $8.7 million compared to $7.8 million in the fourth quarter of 2022. This increase is primarily due to $0.6 million in employee expenses due to the expansion of the sales force, and $0.2 million increase in marketing and travel costs. R&D expenses were $8 million compared to $6.6 million in the fourth quarter of 2022. R&D expenses were up primarily due to $2 million in employee-related costs, which were offset by lower stock-based compensation and capital development costs. G&A expenses were $33.6 million compared to $18.3 million for the fourth quarter of 2022. The increase was primarily due to a $12.8 million change in contingent considerations related to the BIASA acquisition and $1.6 million in acquisition costs partially offset by $1.5 million decrease in stock-based compensation. Intangible asset amortization was $11.7 million compared to $10.3 million in the fourth quarter of 2022. Depreciation in amortization expense was $0.4 million flat with last year. Continuing down the P&L, interest expense was $5.9 million compared to $5.5 million for the fourth quarter of 2022 due to higher interest expense related to the floating portion of our term loan. Miscellaneous income was $2 million compared to an expense of $2.2 million for the fourth quarter of 2022. Income tax expense was $0.1 million bringing the full year provision to $0.2 million compared to $4 million in the prior full year. Net loss for the fourth quarter of 2023 with $12.5 million compared to net income of $9.2 million in the fourth quarter of 2022. Reported adjusted EBITDA for the fourth quarter of 2023 was $29.6 million compared to $31.9 million for the fourth quarter of 2022. Adjusted EBITDA margin was 33.6% for the fourth quarter of 2023 and 34.7% for the full year of 2023. Reported adjusted net income for the fourth quarter of 2023 was $14.3 million compared to $25.2 million for the fourth quarter of 2022. Diluted loss per share for the fourth quarter of 2023 was 8 cents as compared to earnings per share of 6 cents in the fourth quarter of 2022. Adjusted diluted earnings per share for the fourth quarter 2023 was $0.09 compared to $0.16 for the fourth quarter of 2022. Now moving to the balance sheet, we ended the quarter with $235 million of cash and cash equivalents. As of December 31st, 2023, we had $288.2 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance for full year 2024, we expect total revenue in the range of $385 to $400 million, representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar-figure basis in 2024 and expect an adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of 41 to 46 cents per share, fully diluted shares in the range of 160 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 Fiery, for closing remarks.

Thank you, John.

To summarize our message today, we are pleased with our 2023 results, and we look forward to executing our 2024 goals. There's a lot to be excited about at Sertara as we advance BIOS simulation forward with our software and our technology-enabled services.

We will now open the line for questions. Operator, can you open the line?

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press Start11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Windley with Jefferies. Your line is open.

Hi. Good evening. Thanks for taking my question. I want to ask a couple circle around revenue and related questions. On the commercial progress, Bill, you talked about traction in the sales force and seeing a nice uptick in the fourth quarter. I also hear you talking about some of the investments being in that sales force, so maybe you could talk about what you saw in the quarter that helped the bookings to kind of pick up and meet your expectations, and then where you feel like you need to make those investments to, I guess, further that traction.

Thanks, David. Appreciate the question. So what you're referring to for everybody is that earlier in the year, we combined our sales forces across the company into one sales force where we cover both our software and our technology-enabled services. The idea behind doing that was to enable us to offer our clients the full suite of what we have in Sertara because, after all, Most of our clients are buying multiple products and services from us, so it's not really efficient to call on them multiple times. In fact, as we brought this out, I think the first investment we had to make was in the training of our sales forces. We had a lot of people who were specialized in certain products or technology-enabled services. You know, as we went through the year, we invested a lot in training. As we got into the fourth quarter, we had people who were able to go into our clients confidently and talk not just about the product they had been known to have been selling all along, but also be able to say, hey, you know, well, you know, you probably are having a drug at this stage and you ought to look at this. And that started to pay off. I'd say that investment in the sales training and just uniting the sales force, is probably not fully realized yet. We're expecting additional gains as we go through this year. We put, you know, we had limited ability to do things like change compensation plans in the middle of 2023, where now we've kind of put in place United compensation plans as we go into 2024, so that'll make more sense. And, you know, we've got more products, that are launching. We've got our AI products. We've made investments in hiring people that have focused on them. And our goal in general is to kind of up the game in terms of the enterprise sale, taking care of our key accounts and moving up the value chain in terms of how our customers think about us. We did benefit in the fourth quarter, I think, from... pick up a bit in the end markets. And then I think there were quite a number of big customers that had budgets during the year. I think we referred to this earlier, but like halfway through the year, we had clients saying, well, we haven't cut our budget, but we haven't spent half of our budget. So there was a big push on a number of them to kind of catch up to where they wanted to be at the end of the year as well. So that was a welcome opportunity. finish to the year after some of the things we've seen earlier.

Excellent. Okay, great. So my follow-up then on revenue and revenue guidance, really, you've talked really since the IPO in terms of KPI, leading indicator KPIs, and that you're trailing 12-month bookings. growth is generally a good indicator of forward revenue growth. That bookings number is down a couple of percent. Your guidance is up almost, I guess, midpoint, double-digit percent. Maybe two points there. One, how much of the revenue guidance is inorganic from Formetics and Applied Biomath? And then on the organic side, what gives you confidence that you can generate growth out of a trailing bookings number that did not grow? Thanks.

Yeah, hi, David. It's John. Thanks for the question. Yeah, in answer to your first question, then, we're looking at the revenue from that perspective on an organic basis in mid-single digits. So 9% to 13% reported organically is mid-single digits, and we feel like that's a spot that we're highly confident we can execute against multiple different scenarios or outcomes there. Yeah, as far as the second part of the question, then we saw Tier 1 performance do solid. Stepping up from Q3 into Q4, we saw Tier 1s perform very well in both software and in services. And so that helped us as we exited the year. Okay, great. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Riskin with Bank of America. Your line is open.

Hi. Thanks for taking questions. This is Wolf on for Mike. Just picking up on guidance, it looks like your adjusted EBITDA margin outlook for 2024 is a little light considering the sales growth that you're expecting plus the plus where you finished 2023. You touched on it a little bit in the prepared remarks, but can you give us some color in how we should be thinking about OpEx growth in 2024 and any areas where you might be able to find some additional operating leverage?

Yeah, hi, Mike. So, yeah, a couple of key areas that we're investing in there from a margin perspective that's leading us to the 31% to 33%. I'd say that R&D is a key investment area for us, especially as we're looking at software development We have key investments across the software platforms. Think SimSip new modules that Bill mentioned. Think Phoenix hosted. And then very importantly, think about AI investments. So that's one key area where you'll see the investment come in. And then the other, of course, is around the sales force. So Bill was talking about the changes that we made on the commercial model that we're going to expand the sales force. And we're expecting to be able to increase the call point as that comes through. So that's where you're going to see it. I think it's really important to note, though, too, that we're guiding to the margin of 31% to 33%. We're committed to growing EBITDA dollars. So even though we didn't really talk about a range there, I think it's important to note that within that guidance, we're committed to growing EBITDA dollars on a year-over-year basis.

Got it. Thank you. Appreciate the color. And then as a follow-up, it looks like you logged a pretty sizable adjustment for remeasurement of your contingent consideration for Viasa. Can you give us some more color on what drove that and what trends are you seeing in that business particularly?

Yeah, so you're right. What you're seeing there, the adjustment is $12.8 million, and it is centered on Viasa, and it's due to the performance of the business there. So we're pleased with the progress, and it's one of the key areas for investment, and I think Bill wants to make a couple comments on it too.

Yeah, second one John said, I'd say we bought Viasa in basically the beginning of last year at a really good time as AI was rolling, sort of the realization of what AI can do is really rolling out. We've been very pleased with the integration of Vyasa into Sertara. As I mentioned on MyScript, we've already launched a couple of products. We have revenues from them, and we expect that to be, although modest in 2024, we're getting a tremendous amount of customer interest. And as we look forward, we're feeling very excited encouraged by the progress and the possibilities of what we can do with our products going forward, and that's reflected in that revaluation. Thanks a lot.

Thank you. Please stand by for our next question. Our next question comes from the line of Luke Sagat with Barclays. Your line is open.

Great, thanks. I just want to follow up on the M&A stuff. So, you know, buying, you guys just acquired 500 basis points. Can you bucket kind of what the contribution from, for Medix and what Biomath is and give us any type of, you know, valuation or price paid and then give us a sense of what the margin profile is and fundamental profile of these businesses looks like?

Yeah, hi. So, Some of those details that you're asking about as far as purchase price are in the K, so that'll be something to look at. But as far as the margin is concerned, then companies that we purchase, we're purchasing companies that are profitable. They may operate under what our corporate margin is, but we always have a pathway to be able to get them to our corporate margin. And I'd say that for medics and biomass, both fall into that camp.

All right. And then I guess just on the guide here, touch a little bit, I guess, on what Dave was talking about. So, you know, outside of the 500 basis points from the M&A, still came in pretty sizable above street. And so I'm just, what's the visibility right now in the demand environment you know, from a bookings perspective or RFPs that gives you that confidence to hit that acceleration and anything that you can give us on the pacing, what that looks like?

Yeah, there's three things I'd call out. One is around the momentum. So I talked a little bit about momentum exiting the year. We were happy with the tier ones. We also saw stability in the tier threes as we were coming out of the year. And so those bookings, you know, they didn't, They didn't convert to revenue in Q4, of course, and that's what we'd be looking for in 2024. So that momentum is a solid point for us. The second point is just around the backlog conversion that we experienced during 2023 when some of the bookings conversion was slowing down has a trickle-over effect into 2024. So that also is a tailwind for us in being able to convert into 2024. So when you take those together, that spells growth. And then on top of that, of course, we have new products. You know, I was touching on some of those before. We have new products that we're offering across the software platforms, and think AI, think Phoenix hosted, think about the SimCiv modules. When you take those three different catalysts together is why we have confidence in the organic mid-single digits.

All right, thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Garrow with Stevens. Your line is open.

Yeah, good afternoon. Thanks for taking the questions. Wanted to dive into the strong software bookings a bit. Was hoping you could help parse out contributions qualitatively from price increases, adding new clients, the new products that you launched in 2023, and then the kind of old standby of cross-selling existing products to your large existing customer base.

I think the key thing that we'd point you to is this software net retention rate that we think is an important metric in looking at software. So on the quarter, it was 109%. And cooked into that is existing customers expanding. We have pricing in that. And then the build to get to the overall software growth is the addition of new logos on top of it, and that's how you get to 15% on the quarter. So we wouldn't break out really by platform what that looks like, but 15% software growth, 14% on the year is a good spot for us to be. As I mentioned earlier, we saw really strong tier one performance in our customers. in software and actually across the tiers for software as we exited the year on booking. So that positions us well as we approach 2024.

Excellent. I appreciate that. And then to follow up, as we think about the mid-single-digit organic growth for 2024, how would you compare that to the market growth? It seems like the commentary on the end market is improving, and that's reflected in your trajectory. But what I'm really getting at is with your 2024 guidance, does that kind of assume that you're taking market share, or is that more an upside case?

Thanks. Thanks, Jeff. This is Bill. You know, I think a couple things are going on the market right now. So one is, you know, on the larger companies, we're seeing some stabilization in demand as they reevaluated their portfolios last year. A lot of them have come out of that and decided what they want to do. So we've seen, I think, and we've assumed that that demand stays at least steady as we go through the year. We are hearing signs of a pickup in biotechs. There's some statistics published that indicate increased funding. I don't think we've really seen that come through in our bookings so far. But based on, you know, what we're seeing, we're expecting that that, you know, maybe in the second half of the year, we'll start to see that, you know, a little bit healthier market segment there than we had in 2023.

Great. Thanks for taking the question.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Czerny with Lirik Partners. Your line is open.

Good afternoon, and thanks for all the details so far. Appreciate the color on the organic growth. Can you just give us a little sense on how you expect it to trend between software and services? I mean, I know in some respects we can follow some of the bookings, but just want to make sure we have a good understanding on various different growth rates, both organic and organic contribution. against the backdrop of your margin commentary for the year?

Yeah, so the way to think about it as a sort of cadence through the year would be that we would see some acceleration across both software and services Q1 through into Q4. I'd say for software that there's less of that, and then I think there's really more of a story on first half, second half, on the services side of the business. But even when you look at that, it's probably a couple hundred basis points north and south of 50% when you look at services accelerating into the back half. Coinciding with that also would be from a margin perspective, since historically we have had a strong Q4, and because of the ramp that we'd see going as we progress through the year, then we'd expect the margin to progress in that fashion as well. Margin progressing alongside services, which I assume would come as a lower gross margin or some other... No, I meant in that regard total company margin and the progression during the course of the year. Our margin would typically be lower in Q1 than it would be in Q4, where we've historically, including this past Q4, had strong revenues.

Okay, got it. And then when you think about where you sit right now, obviously having completed the recent M&A, building into QSP, how do you think about that next leg of pipeline for inorganic growth? This is obviously a business that's had great contributions as you've built out that portfolio. At what point in time do you feel like service-wise critical mass has essentially been achieved or is this going to continually be, especially as you get back into the market with more demand, a perpetual growth? growth opportunity for more and more bolt-ons like we've seen recently been successfully?

Yeah, so this is Bill. I'll take this one. So we've been fortunate to have a history of, you know, a fair number of very successful bolt-on acquisitions that helped us create the company. But we've said from the beginning that, you know, I guess the first point is we're in We're in an interesting space where there's a lot of interesting technologies and companies available, but we don't think about the world as we expect or have to do inorganic deals. Most of the deals we've done have been companies that we've worked with very closely. We knew them really well, and it made a lot of sense for them to come into a bigger platform, and we've been successful with that. As we go forward, we're always looking at things. But, you know, if we do – the way I feel like this is if we do no deals, that would be fine. There's plenty of organic opportunities in Sertara. But sometimes you see technologies where, you know, where you add one-on-one and you get more than two. And when we see those types of things, I think it's really good that we have the ability and the track record of moving successfully to integrate them into Sertara.

Got it. Thanks so much.

Thank you. Please stand by for our next question. Our next question comes from the line of Vikram with Morgan Stanley. Your line is open.

Hi, good afternoon. This is Vikram. Thanks for taking our questions. We had two. My first one was a follow-up to your commentary on the health of the biotech markets. I just wanted to clarify one item on your guidance here. So does your current revenue guidance for 2024 contemplate a certain level of recovery in the second half of the year, or would that present more percent upside to your current guidance. And then as a follow-up, I was hoping to get your latest thoughts on geographic expansion and whether there are any ex-U.S. geographies that represent particular areas of focus for you. Thanks.

Yeah, sure. So as far as the biotech market itself, then we do – we have it at stable the way that we presented our guidance and the way that we think about it. So as we looked at Q3, we saw stability there. We exited Q4 with stability, and our guidance contemplates stability throughout the year. Of course, we read the same things everybody else does, so we know that there is the possibility of an improving market. and perhaps that happens more in the back half, but that's not the way that we built the guidance in this case. Oh, and then the second part of your question was related to ex-US. I mean, some of the investments that we're making outside of the US are areas that we see for growth, including Asia Pacific. We have a strong base of business in Europe, But I'd tell you that, you know, the growth profile of what we're looking for here in the guidance is, you know, is centered mainly in the U.S. and in the European markets for 2024.

Understood. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question. Please stand by for our next question. Our next question comes from the line of Max Mock with Wim Blair. Your line is open.

Hey, good afternoon, guys. Thanks for taking our questions. I'm just asking a little bit about a longer-term one here on the margins and just getting your thoughts on the long-term trajectory. In particular, I know, you know, during the IPO process, you mentioned getting up to high 30% longer-term. Just wondering if that is still kind of the long-term target here and how we should think about the margin trajectory beyond 2024.

Yeah, so I'll start and I'll let John chime in. The way we think about this is we can easily run this company at mid-30s EBITDA margin. Right now, at this period of time, we have significant opportunities to make investments in our software and our AI, some of the things we talked about. We're going to do that through 2024. At the end of 2024, we could You know, we'll certainly have the option to go right back to where we were, but we'll evaluate and see what the opportunities are for our company and our shareholders at that point.

Yeah, and then so to carry on to what Bill said, as we look at 2024, of course, we're looking at 31% to 33% margin. There's investments that, you know, that we talked about that we're making. I think some of those investments, as we mentioned, the sales force, we'll start to kick in really at the very tail end of 2024, and then we'll have a stronger impact in 2025. And so, as Bill mentioned, it's really within the management team's control to evaluate the pace of those investments and the amount of those investments and be able to toggle our margin accordingly as we move through this year.

Got it. Thank you. Maybe just following up on the services piece, can you remind us for 2023, as we move into 2024 here, how big of a piece regulatory services is within the broader services bucket, how that piece performed in total in 2023, and then what you have embedded in your guide for that regulatory services piece in 2024?

Yeah, so Max, in Q4, the regulatory business represented 19% of total revenue. Of the services revenue, it represents about 30% of it. As we had mentioned, we anticipated that business contracting during 2023. It did. The positive signs, though, that you heard us talking about were mainly centered in bookings and came in Q4 where we had said that business is marked by often having large deal bookings come in in Q4, and we saw that happen. So we had a number of large-size bookings come in in Q4 that's going to turn to revenue during 2024. So, you know, as we approach 2024 and what that business looks like, you know, inside of our guidance there, then we see it returning to growth. But, you know, that's going to happen – over a period of quarters.

Understood. Thanks again for taking our questions. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question.

I'm showing no further questions in the queue.

I would now like to turn the call back over to William for closing remarks.

Thank you, everybody, for joining us tonight. We're looking forward to a great 2024 for Sartara, and we'll see you on the next call. Good evening.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. you Thank you.

Thank you. Thank you.

Hello, and thank you for standing by. Welcome to CITAR fourth quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. I would now like to hand the conference over to David Daigler, Head of Investor Relations. Sir, you may begin.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Sertara, we have William Ferry, Chief Executive Officer, and John Gallagher, Chief Financial Officer. Earlier today, Sertara released financial results for the quarter ended December 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 response 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 press release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. The conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 29th, 2024. CTAR disclaims any obligation except as required by law to update or revise any financial projections or forward-looking statements, whether it be against 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 CTAR's fourth quarter and full-year earnings call. John and I will start with prepared remarks, and then we will take your questions. We are pleased to finish the year with a solid fourth quarter performance in both software and in technology-enabled services. 2023 presented our industry with many challenges, as pharmaceutical and biotech customers were conservative in their spending amidst macroeconomic and geopolitical pressures. Our full year reported revenue growth was 6%. in line with the guidance we gave in August. This revenue growth included 14% growth in software and 1% in technology-enabled services. We had record software sales in the fourth quarter, and we were encouraged to see our technology-enabled services bookings pick up in the second half of 2023. Tatara's goal is to enable model-informed drug development, or MIDD, in the global biopharmaceutical industry. MIDD is an approach that utilizes biological and statistical models derived from preclinical and clinical data to inform decision-making in drug development and commercialization. Biosimulation is a critical component of MIDD that uses computer-aided mathematical simulation of biological processes and systems to understand the action of a drug in a human body or in a population of humans. Tatara enables our customers to use biosimulation and MIDD to increase the probability of success in bringing a new drug to market and to decrease the cost of drug development. We have an extensive and expanding list of customers within the biopharmaceutical industry, which expanded in 2023 to a count of 2,395. Within this customer base as of December 31st, 2023, we had 389 customers with an annual contract value of more than $100,000, representing growth of 5% year over year. We also had 63 customers with an annual contract value of more than $1 million, up 11% from 2022. During the second half of 2023, we reorganized our commercial infrastructure to better sell our end-to-end solutions, and the team delivered improved results in both software and services throughout the second half. With our new enterprise sales approach, we have effectively captured cross-selling opportunities, leading to expanded relationships with some of our top customers. I am very happy with the progress our team has made so far, and I'm confident that these improvements will support our commercial initiatives in the coming years. Our software business growth of 14% in 2023 was driven by our SIMSIP, Phoenix, and Pinnacle 21 platforms. We have been investing in these products to add new features, a number of which launched during 2023 and will continue to increase traction as we move into 2024. Some of the highlights in 2023 included the 22nd version of our SIMSIP PVPK simulator, which included several upgrades to our modeling and simulation capabilities. We also launched SimCit Biopharmaceuticals, a new module designed to aid drug formulation and expand our presence in the early stages of drug development. Following the acquisition of Viasa last January, we began to integrate AI and machine learning across our portfolio. An early example was the release of an updated version of D360, which featured deep learning models for novel chemical structure generation and automated property predictions. We also launched CoAuthor, a new regulatory writing tool that uses generative AI to aid in the drafting of regulatory submissions. Customer feedback on our AI products has been encouraging and drove customer interest in the second half of the year. Looking ahead to 2024, we will continue to invest in our software platform. One key area of focus is our clinical data strategy. Last fall, we augmented the Pinnacle 21 data exchange with the acquisition of Formetics, a provider of data standardization and automation software. With Formetics, Sitara will bring increased efficiency to clinical trial data management via an end-to-end solution. In addition to Pinnacle 21, we also plan to invest in other areas, such as new models for biosimulation, new products and product features, and additional integration of AI across the platform. As biostimulation becomes more widespread, we are broadening the range of our offerings to support additional use cases in therapeutic areas. I am confident that these investments will create new opportunities to grow our platform on a global scale and penetrate deeper into our customers' R&D organizations. Our technology-enabled services business overcame market headwinds to deliver solid performance in the second half of 2023. In August, we announced the consolidation of our biosimulation services and regulatory services teams in order to better deliver all of Sertara's capabilities to our customers' projects. Thus far, we are pleased with the improved execution in the services business, which is performing better as a combined organization. Across our technology-enabled services group, We saw a pickup in new business activity, which led to sequential bookings growth in the fourth quarter. Customers of all sizes continue to recognize the value that Sitara's services can add to their modeling, simulation, and regulatory projects. We look forward to building on this momentum in 2024. As a leader of biosimulation, expanding into emerging methods of modeling and simulation is a key component of our business strategy. In December, we announced the acquisition of Applied Biomath, a leading provider of QSP services. QSP, or Quantitative Systems Pharmacology, combines computationally modeling and experimental data to simulate how the body will respond to a drug. QSP is at the cutting edge of biosimulation approaches and has vast potential to improve the biopharmaceutical R&D and inform decision-making across the drug development process. Along with proprietary software, Applied Biomath brings a complimentary customer base, which includes clients in the discovery and preclinical stages of development. By combining the Applied Biomath and Sertara QSP teams, we are proud to have the largest QSP services group in the drug development industry. In 2023, we continue to invest in our business and expand our team worldwide. We prioritized hiring leading scientists and subject matter experts to support our growth. As of the end of 2023, we had about 1,400 employees, including more than 400 employees with doctorate degrees. We believe we are the employee of choice in the biosimulation industry, and we offer a strong culture and commitment to innovation. We believe there's an opportunity for us to accelerate some investments in 2024 across our organization. In particular, we intend to invest in the development of software capabilities, including AI, as well as expand our commercial organization, including key account management positions. These investments will start to yield minor benefits in 2024 but will be most impactful in 2025 and 2026. In closing, we are pleased with our 2023 results. The growth opportunity in biosimulation continues to strengthen as drug developers look to maximize capital efficiency and reduce pipeline risk. I am confident that the secular adoption of biosimulation, our improved commercial execution, and the investments we are making in our products and our team will support strong growth in 2024 and beyond. I will now turn it over to our CFO, John Gallagher, to discuss our fourth quarter and full year financial results in more detail.

Thank you, William.

Hello, everyone. Total revenue for the three months ended December 31st, 2023, was $88 million, representing year-over-year growth of 2% on a reported basis and 1% on a constant currency basis. For the full year 2023, total revenue was $354.3 million, which represents 6% growth on a reported basis and on a constant currency basis. Bookings, which provide visibility into the year ahead, came in at $402.3 million for the trailing 12-month period ended December 31, 2023, down 2% year over year. Our total company book-to-bill ratio ended the year at 1.14. Bookings as of December 31, 2023 do not include bookings from Formatix or Applied Biomass. Software revenue was $33.6 million in the fourth quarter, which increased 15% over the prior year period on a reported basis and 14% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. For the full year, software revenue was $131.7 million, up 14% on a reported basis and on a constant currency basis. Rattable and subscription software revenue amounted to 62% of total software revenue for the year, up from 60% in the prior year. Routable and subscription revenue accounted for 68% of fourth quarter software revenues. Software bookings were $43.3 million in the fourth quarter, which increased 10% from the prior year period. Trailing 12-month software bookings were $136.9 million, also up 10% year over year. The software aggregate renewal rate was 85% in the fourth quarter and 88% for the year. I'd like to take a moment and discuss the ARR metric and how it has evolved over the past couple of years. We had a very strong Q4 software revenue performance, up 15%, and on a full year performance, up 14%. Despite our ARR being in the mid-80s in the second half of the year, and 88% for the full year. As our software business has grown and expanded, particularly with additional features and the mixed conversion to subscription or ratable software revenue, we have found the ARR metric to be less informative of the underlying performance of the business. As we evaluate customer retention and growth in existing customers across the portfolio, The ARR metric is not capturing the performance of the products or business when incorporating the SAS conversion, Viasa options, and expanding Pinnacle 21 features, among other initiatives. As a result, we are moving away from ARR as a KPI of the software business internally, and we'll do so externally as well. For continuity, we will report the ARR on an annual basis going forward. We do believe that the net retention rate, which reflects the existing customer revenue, is a better metric to measure the performance of our existing business. In the fourth quarter and for the full year 2023, the net retention rate was 109%, which is consistent with our long-term growth algorithm. The fourth quarter revenue growth of 15% and full year revenue growth of 14% represents healthy performance and contribution from new customers. On a go-forward basis, we intend to provide the software net retention ratio on a quarterly basis. Now, turning to services revenue, which was $54.4 million in the fourth quarter, down 5% versus the prior year on a reported basis, and down 6% on a constant currency basis. For the full year, services revenue was $222.7 million, up 1% on a reported basis and on a constant currency basis. Technology-driven services bookings in the fourth quarter were $75.6 million, which decreased 7% from the prior year period. TTM services bookings were $265.4 million, also down 7% as compared to the prior year. Total cost of revenue for the fourth quarter of 2023 was $34.1 million, an increase from $31.8 million in the fourth quarter of 2022, primarily due to a $2.6 million increase in stock-based compensation offset by lower outside consulting costs of $0.4 million. Total operating expenses for the fourth quarter of 2023 were $62.4 million, an increase from $43.5 million in the fourth quarter of 2022. The components of operating expenses are as follows. Sales and marketing expenses were $8.7 million compared to $7.8 million in the fourth quarter of 2022. This increase is primarily due to $0.6 million in employee expenses due to the expansion of the sales force, and $0.2 million increase in marketing and travel costs. R&D expenses were $8 million compared to $6.6 million in the fourth quarter of 2022. R&D expenses were up primarily due to $2 million in employee-related costs, which were offset by lower stock-based compensation and capital development costs. G&A expenses were $33.6 million compared to $18.3 million for the fourth quarter of 2022. The increase was primarily due to a $12.8 million change in contingent considerations related to the BIASA acquisition and $1.6 million in acquisition costs partially offset by $1.5 million decrease in stock-based compensation. Intangible asset amortization was $11.7 million compared to $10.3 million in the fourth quarter of 2022. Depreciation in amortization expense was $0.4 million flat with last year. Continuing down the P&L, interest expense was $5.9 million compared to $5.5 million for the fourth quarter of 2022 due to higher interest expense related to the floating portion of our term loan. Miscellaneous income was $2 million compared to an expense of $2.2 million for the fourth quarter of 2022. Income tax expense was $0.1 million bringing the full year provision to $0.2 million compared to $4 million in the prior full year. Net loss for the fourth quarter of 2023 with $12.5 million compared to net income of $9.2 million in the fourth quarter of 2022. Reported adjusted EBITDA for the fourth quarter of 2023 was $29.6 million compared to $31.9 million for the fourth quarter of 2022. Adjusted EBITDA margin was 33.6% for the fourth quarter of 2023 and 34.7% for the full year 2023. Reported adjusted net income for the fourth quarter of 2023 was $14.3 million compared to $25.2 million for the fourth quarter of 2022. Diluted loss per share for the fourth quarter of 2023 was 8 cents as compared to earnings per share of 6 cents in the fourth quarter of 2022. Adjusted diluted earnings per share for the fourth quarter 2023 was $0.09 compared to $0.16 for the fourth quarter of 2022. Now moving to the balance sheet, we ended the quarter with $235 million of cash and cash equivalents. As of December 31st, 2023, we had $288.2 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance for full year 2024, we expect total revenue in the range of $385 to $400 million, representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar figure basis in 2024 and expect an adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of 41 to 46 cents per share, fully diluted shares in the range of 160 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 Fiery, for closing remarks. Thank you, John.

To summarize our message today, we are pleased with our 2023 results, and we look forward to executing our 2024 goals. There's a lot to be excited about at Sertara as we advance biostimulation forward with our software and our technology-enabled services.

We will now open the line for questions. Operator, can you open the line?

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press Start11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Windley with Jefferies. Your line is open.

Hi. Good evening. Thanks for taking my question. I want to ask a couple, circle around revenue and related. On the commercial progress, Bill, you talked about traction in the sales force and seeing a nice uptick in the fourth quarter. I also hear you talking about some of the investments being in that sales force, so maybe you could talk about what you saw in the quarter that helped the bookings to kind of pick up and meet your expectations, and then where you feel like you need to make those investments to, I guess, further that traction.

Thanks, David. Appreciate the question. So what you're referring to for everybody is that earlier in the year, we combined our sales forces across the company into one sales force where we cover both our software and our technology-enabled services. The idea behind doing that was to enable us to offer our clients the full suite of what we have in Sertara because, after all, You know, most of our clients are buying multiple products and services from us, so it's not really efficient to call on them multiple times. And, in fact, you know, as we brought this out, I think the first investment we had to make was in the training of our sales forces, and we had a lot of people who were specialized in certain products or technology-enabled services. You know, as we went through the year, we invested a lot in training. As we got into the fourth quarter, we had people who were able to go into our clients confidently and talk not just about the product they had been known to have been selling all along, but also be able to say, hey, you know, well, you know, you probably are having a drug at this stage and you ought to look at this. And that started to pay off. I'd say that investment in the sales training and just uniting the sales force, is probably not fully realized yet. We're expecting additional gains as we go through this year. We put, you know, we had limited ability to do things like change compensation plans in the middle of 2023, where now we've kind of put in place United compensation plans as we go into 2024, so that'll make more sense. And, you know, we've got more products. that are launching. We've got our AI products. We've made investments in hiring people that have focused on them. And our goal in general is to kind of up the game in terms of the enterprise sale, taking care of our key accounts and moving up the value chain in terms of how our customers think about us. We did benefit in the fourth quarter, I think, from... pick up a bit in the end markets. And then I think there were quite a number of big customers that had budgets during the year. I think we referred to this earlier, but like halfway through the year, we had clients saying, well, we haven't cut our budget, but we haven't spent half of our budget. So there was a big push on a number of them to kind of catch up to where they wanted to be at the end of the year as well. So that was a welcome opportunity. to the year after some of the things we'd seen earlier.

Excellent. Okay, great. So my follow-up then on revenue and revenue guidance, really, you've talked really since the IPO in terms of KPI, leading indicator KPIs, and that you're trailing 12-month bookings. growth is generally a good indicator of forward revenue growth. That bookings number is down a couple of percent. Your guidance is up almost, I guess, midpoint double-digit percent. Maybe two points there. One, how much of the revenue guidance is inorganic from Formetics and Applied Biomath? And then on the organic side, what gives you confidence that you can generate growth out of a trailing bookings number that did not grow? Thanks.

Yeah, hi, David. It's John. Thanks for the question. Yeah, in answer to your first question, then, we're looking at the revenue from that perspective on an organic basis in mid-single digits. So 9% to 13% reported organically is mid-single digits, and we feel like that's a spot that we're highly confident we can execute against multiple different scenarios or outcomes there. Yeah. As far as the second part of the question, then we saw Tier 1 performance do solid. Stepping up from Q3 into Q4, we saw Tier 1s perform very well in both software and in services. And so that helped us as we exited the year. Okay. Great. Thank you.

Thank you. Will you stand by for our next question? Our next question comes from the line of Michael Riskin with Bank of America. Your line is open.

Hi. Thanks for taking questions. This is Wolf on for Mike. Just picking up on guidance, it looks like your adjusted EBITDA margin outlook for 2024 is a little light considering the sales growth that you're expecting plus the plus where you finished 2023. You touched on it a little bit in the prepared remarks, but can you give us some color in how we should be thinking about OpEx growth in 2024 and any areas where you might be able to find some additional operating leverage?

Yeah. Hi, Mike. So, yeah, a couple of key areas that we're investing in there from a margin perspective that's leading us to the 31% to 33%. I'd say that R&D is a key investment area for us, especially as we're looking at software development We have key investments across the software platforms. Think SimSip new modules that Bill mentioned. Think Phoenix hosted. And then very importantly, think about AI investments. So that's one key area where you'll see the investment come in. And then the other, of course, is around the sales force. So Bill was talking about the changes that we made on the commercial model that we're going to expand the sales force. And we're expecting to be able to increase the call point as that comes through. So that's where you're going to see it. I think it's really important to note, though, too, that we're guiding to the margin of 31% to 33%. We're committed to growing EBITDA dollars. So even though we didn't really talk about a range there, I think it's important to note that within that guidance, we're committed to growing EBITDA dollars on a year-over-year basis.

Got it. Thank you. Appreciate the color. And then as a follow-up, it looks like you logged a pretty sizable adjustment for remeasurement of your contingent consideration for Viasa. Can you give us some more color on what trends are you seeing in that business particularly?

Yeah, so you're right. What you're seeing there, the adjustment is $12.8 million, and it is centered on Viasa, and it's due to the performance of the business there. So we're pleased with the progress, and it's one of the key areas for investment, and I think Bill wants to make a couple comments on it too.

Yeah, second one John said, I'd say we bought Viasa in basically the beginning of last year at a really good time as AI was rolling, sort of the realization of what AI can do is really rolling out. We've been very pleased with the integration of Vyasa into Sertara. As I mentioned on MyScript, we've already launched a couple of products. We have revenues from them, and we expect that to be, although modest in 2024, we're getting a tremendous amount of customer interest. And as we look forward, we're feeling very excited encouraged by the progress and the possibilities of what we can do with our products going forward, and that's reflected in that revaluation. Thanks a lot.

Thank you. Please stand by for our next question. Our next question comes from the line of Luke Sagat with Barclays. Your line is open.

Great. Thanks. I just want to follow up on the M&A stuff. So, you know, buying, you guys just acquired 500 basis points. Can you bucket kind of what the contribution from, for Medix and what Biomath is and give us any type of, you know, valuation or price paid and then give us a sense of what the margin profile is and fundamental profile of these businesses looks like?

Yeah. Hi. So, Some of those details that you're asking about as far as like purchase price are in the K. So that'll be something to look at. But as far as like the margin is concerned, then, you know, companies that we purchase, you know, we're purchasing companies that are profitable. They, you know, they may operate under what our corporate margin is, but we always have a pathway to be able to get them to our corporate margin. And I'd say that for medics and biomass, both fall into that camp.

All right. And then I guess just on the guide here, touch a little bit, I guess, on what Dave was talking about. So, you know, outside of the 500 basis points from the M&A, still came in pretty sizable above street. And so I'm just, what's the visibility right now in the demand environment you know, from a bookings perspective or RFPs that gives you that confidence to hit that acceleration and anything that you can give us on the pacing, what that looks like?

Yeah, there's three things I'd call out. One is around the momentum. So I talked a little bit about momentum exiting the year. We were happy with the tier ones. We also saw stability in the tier threes as we were coming out of the year. And so those bookings, you know, they didn't, They didn't convert to revenue in Q4, of course, and that's what we'd be looking for in 2024. So that momentum is a solid point for us. The second point is just around the backlog conversion that we experienced during 2023 when some of the bookings conversion was slowing down has a trickle-over effect into 2024. So that also is a tailwind for us in being able to convert into 2024. So when you take those together, that spells growth. And then on top of that, of course, we have new products. You know, I was touching on some of those before. We have new products that we're offering across the software platforms, and think AI, think Phoenix hosted, think about the SimCiv modules. When you take those three different catalysts together is why we have confidence in the organic mid-single digits.

All right, thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Garrow with Stevens. Your line is open.

Yeah, good afternoon. Thanks for taking the questions. Wanted to dive into the strong software bookings a bit. Was hoping you could help parse out contributions qualitatively from price increases, adding new clients, the new products that you launched in 2023, and then the kind of old standby of cross-selling existing products to your large existing customer base.

I think the key thing that we'd point you to is this software net retention rate that we think is an important metric in looking at software. So on the quarter, it was 109%. And cooked into that is existing customers expanding. We have pricing in that. And then the build to get to the overall software growth is the addition of new logos on top of it, and that's how you get to 15% on the quarter. So we wouldn't break out really by platform what that looks like, but 15% software growth, 14% on the year is a good spot for us to be. As I mentioned earlier, we saw really strong tier one performance in our customers. in software and actually across the tiers for software as we exited the year on booking. So that positions us well as we approach 2024.

Excellent. I appreciate that. And then to follow up, as we think about the mid-single-digit organic growth for 2024, how would you compare that to the market growth? It seems like the commentary on the end market is improving, and that's reflected in your trajectory. But what I'm really getting at is with your 2024 guidance, does that kind of assume that you're taking market share, or is that more an upside case?

Thanks. Thanks, Jeff. This is Bill. You know, I think a couple things are going on the market right now. So one is, you know, on the larger companies, we're seeing some stabilization in demand as they reevaluated their portfolios last year. A lot of them have come out of that and decided what they want to do. So we've seen, I think, and we've assumed that that demand stays at least steady as we go through the year. We are hearing signs of a pickup in biotechs. There's some statistics published that indicate increased funding. I don't think we've really seen that come through in our bookings so far. But based on what we're seeing, we're expecting that maybe in the second half of the year, we'll start to see that a little bit healthier market segment there than we had in 2023.

Great. Thanks for taking the question.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Czerny with Lirik Partners. Your line is open.

Good afternoon, and thanks for all the details so far. Appreciate the color on the organic growth. Can you just give us a little sense on how you expect it to trend between software and services? I mean, I know in some respects we can follow some of the bookings, but just want to make sure we have a good understanding on various different growth rates, both organic and inorganic contribution. against the backdrop of your margin commentary for the year?

Yeah, so the way to think about it as a sort of cadence through the year would be that we would see some acceleration across both software and services Q1 through into Q4. I'd say for software that there's less of that, and then I think there's really more of a story on first half, second half, on the services side of the business. But even when you look at that, it's probably a couple hundred basis points north and south of 50% when you look at services accelerating into the back half. Coinciding with that also would be from a margin perspective, since historically we have had a strong Q4, and because of the ramp that we'd see going as we progress through the year, then we'd expect the margin to progress in that fashion as well. Margin progressing alongside services, which I assume would come as a lower gross margin or some other... No, I meant in that regard total company margin and the progression during the course of the year. Our margin would typically be lower in Q1 than it would be in Q4, where we've historically, including this past Q4, had strong revenues.

Okay, got it. And then when you think about where you sit right now, obviously having completed the recent M&A, building into QSP, how do you think about that next leg of pipeline for inorganic growth? This is obviously a business that's had great contributions as you've built out that portfolio. At what point in time do you feel like service-wise critical mass has essentially been achieved or is this going to continually be, especially as you get back into the market with more demand, a perpetual growth? growth opportunity for more and more bolt-ons like we've seen recently been successfully?

Yeah, so this is Bill. I'll take this one. So we've been fortunate to have a history of, you know, a fair number of very successful bolt-on acquisitions that helped us create the company. But we've said from the beginning that, you know, I guess the first point is we're in We're in an interesting space where there's a lot of interesting technologies and companies available, but we don't think about the world as we expect or have to do inorganic deals. Most of the deals we've done have been companies that we've worked with very closely. We knew them really well, and it made a lot of sense for them to come into a bigger platform, and we've been successful with that. As we go forward, we're always looking at things. But, you know, if we do – the way I feel like this is if we do no deals, that would be fine. There's plenty of organic opportunities in Sertara. But sometimes you see technologies where, you know, where you add one-on-one and you get more than two. And when we see those types of things, I think it's really good that we have the ability and the track record of moving successfully to integrate them into Sertara.

Thanks so much.

Thank you. Please stand by for our next question. Our next question comes from the line of Vikram with Morgan Stanley. Your line is open.

Hi, good afternoon. This is Vikram. Thanks for taking our questions. We had two. My first one was a follow-up to your commentary on the health of the biotech markets. I just wanted to clarify one item on your guidance here. So does your current revenue guidance for 2024 contemplate a certain level of recovery in the second half of the year, or would that present more percent upside to your current guidance. And then as a follow-up, I was hoping to get your latest thoughts on geographic expansion and whether there are any ex-U.S. geographies that represent particular areas of focus for you. Thanks.

Yeah, sure. So as far as the biotech market itself, then we do – we have it at stable the way that we presented our guidance and the way that we think about it. So as we looked at Q3, we saw stability there. We exited Q4 with stability, and our guidance contemplates stability throughout the year. Of course, we read the same things everybody else does, so we know that there is the possibility of an improving market and perhaps that happens more in the back half, but that's not the way that we built the guidance in this case. Oh, and then the second part of your question was related to ex-US. I mean, some of the investments that we're making outside of the US are areas that we see for growth, including Asia Pacific. We have a strong base of business in Europe, But I'd tell you that, you know, the growth profile of what we're looking for here in the guidance is, you know, is centered mainly in the U.S. and in the European markets for 2024.

Understood. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question. Please stand by for our next question. Our next question comes from the line of Max Mock with Wim Blair. Your line is open.

Hey, good afternoon, guys. Thanks for taking our questions. I'm just asking a little bit about a longer-term one here on the margins and just getting your thoughts on the long-term trajectory. In particular, I know, you know, during the IPO process, you mentioned getting up to high 30% longer-term. Just wondering if that is still kind of the long-term target here and how we should think about the margin trajectory beyond 2024.

Yeah, so I'll start and I'll let John chime in. The way we think about this is we can easily run this company at mid-30s EBITDA margin. Right now, at this period of time, we have significant opportunities to make investments in our software and our AI, some of the things we talked about. We're going to do that through 2024. At the end of 2024, we could You know, we'll certainly have the option to go right back to where we were, but we'll evaluate and see what the opportunities are for our company and our shareholders at that point.

Yeah, and then so to carry on to what Bill said, as we look at 2024, of course, we're looking at 31% to 33% margin. There's investments that, you know, that we talked about that we're making. I think some of those investments, as we mentioned, the sales force, we'll start to kick in really at the very tail end of 2024, and then we'll have a stronger impact in 2025. And so, as Bill mentioned, it's really within the management team's control to evaluate the pace of those investments and the amount of those investments and be able to toggle our margin accordingly as we move through this year.

Got it. Thank you. Maybe just following up on the services piece, can you remind us for 2023, as we move into 2024 here, how big of a piece regulatory services is within the broader services bucket, how that piece performed in total in 2023, and then what you have embedded in your guide for that regulatory services piece in 2024? Yeah.

So, Max, in Q4, the regulatory business represented 19% of total revenue. Of the services revenue, it represents about 30% of it. As we had mentioned, we anticipated that business contracting during 2023. It did. The positive signs, though, that you heard us talking about were mainly centered in bookings and came in Q4 where we had said that business is marked by often having large deal bookings come in in Q4, and we saw that happen. So we had a number of large-size bookings come in in Q4 that's going to turn to revenue during 2024. So, you know, as we approach 2024 and what that business looks like, you know, inside of our guidance there, then we see it returning to growth. But, you know, that's going to happen – over a period of quarters.

Understood. Thanks again for taking our questions. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question. I'm showing no further questions in the queue. I would now like to turn the call back over to William for closing remarks.

Thank you, everybody, for joining us tonight. We're looking forward to a great 2024 for Sartara, and we'll see you on the next call. Good evening.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.