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spk15: 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-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Dykler.
spk08: 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 March 31st, 2024. 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 company materials for additional information, which you can find on the company's investor relations website. In their remarks and 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 press release available on the company's website. Please refer to the reconciliation tables in the company materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Sartara 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'll turn the call over to William.
spk06: Thank you, David. Good afternoon, everyone. Thank you for joining Sartara's first quarter earnings call. John and I will start with prepared remarks, and then we will take your questions. Throughout the first quarter, Certara built upon the solid business momentum observed in the fourth quarter of 2023. We're pleased with our start to the year, delivering total revenue of $96.7 million, representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI-enhanced products continues to grow following the acquisition of Viasa, just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, TAR's products and services remain top of mind. We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R&D initiatives. Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, it will take time for funding to translate into bookings and sales at Sertara, and we have not yet seen an inflection point in activity through the first several months of the year. Internally, Our focus remains on several key initiatives that will drive Certara's next stage of growth. On our last earnings call, we highlighted the investments we are targeting in 2024, including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities. We are dedicated to unifying our organization, both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, the unifying platform that integrates access to our entire software suite of applications. Sitara Cloud will make our software solutions easier to navigate across each user's organization and with external parties, enabling collaboration across different workflows. Sitara Cloud already has 1,500 client-specific portals, and it's currently used by 15 of the top 30 biopharmaceutical companies. Investments like Sitara Cloud and other initiatives underway are designed to ease access to the Sitara platform, improve data and information security, and deliver enhanced capabilities to customers. I am proud of the work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now, turning to the performance of the business, in the first quarter, we delivered software revenue of $39.3 million, representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry-leading SimCit, Phoenix, and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix hosted, which is a cloud-based version of the product. With cloud computing integrated into Phoenix, customers will have immediate access to upgrades, remote workflow processing, and improved performance and runtimes. Customer uptake continued to progress nicely, and we are pleased by the feedback we have received to date. Throughout the quarter, our software team also began to accelerate the development of CoAuthor, a regulatory writing tool that uses AI and machine learning to draft regulatory submissions. The next version of CoAuthor will be officially launched at the end of the second quarter. and early versions are in use by our internal regulatory writing team on customer projects. Over time, co-author will drive efficiencies across different regulatory writing processes, and we have received significant interest from customers. Our technology-driven services segment delivered revenue of $57.3 million in the first quarter, which was flat year-over-year on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious customer spending in 2023. In the first few months of the year, we have been encouraged by customer discussions across our services group. The TAR's ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements. In conclusion, Pitara is in a strong position to grow in 2024, headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for biostimulation, while also making our products easier to use. I'm confident in our ability to meet our 2024 goals, and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.
spk05: Thank you, William. Hello, everyone. Total revenue for the three months ended March 31, 2024, was $96.7 million, representing year-over-year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39.3 million in the first quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. Rattable and subscription revenue accounted for 61% of first quarter software revenues, up from 56% in the prior year period. Software bookings were $33.1 million in the first quarter, which increased 8% from the prior year period. Trailing 12-month software bookings were $139.5 million, up 11% year over year. In the first quarter, the software net retention rate was 114%, which is consistent with our long-term growth profile. Now, turning to services revenue, which was $57.3 million in the first quarter, flat versus the prior year period on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. Technology-driven services bookings for the first quarter were $72.7 million, which decreased 11% from the prior year period. Trailing 12-month services bookings were $256 million, also down 11% as compared to the prior year. Total cost of revenue for the first quarter of 2024 was $39.3 million, an increase from $34.9 million in the first quarter of 2023, primarily due to a $1.9 million increase in employee-related expenses, a $1.2 million increase in stock-based compensation, and a $0.8 million increase in software amortization. Total operating expenses for the first quarter of 2024 were $58.7 million, an increase from $48 million in the first quarter of 2023. The components of operating expenses are as follows. Sales and marketing expenses were $10.7 million compared to $8 million in the first quarter of 2023. This increase is primarily due to a $1.7 million increase in employee-related expenses due to the expansion of the sales force. R&D expenses were $12 million compared to $9.3 million for the first quarter of 2023. R&D expenses were up primarily due to a $3 million increase in employee-related costs as we grew our team of software developers. G&A expenses were $23 million compared to $19.8 million for the first quarter of 2023. The increase was due to a $1.6 million change in contingent consideration, primarily related to the acquisition of buy asset, and a $1.1 million increase in employee related expenses, partially offset by a $0.9 million decrease in stock based compensation. Intangible asset amortization was $12.6 million compared to $10.5 million in the first quarter of 2023. Depreciation and amortization expense was $0.4 million flat with last year. Continuing down the P&L, interest expense was $5.8 million compared to $5.5 million for the first quarter of 2023 due to higher interest on the floating rate portion of our term law. Miscellaneous income was $1.6 million compared to $0.5 million in the first quarter of 2023, primarily related to the return on our cash invested. Income tax was a benefit of $0.8 million compared to an expense of $1.1 million for the first quarter of 2023. Net loss for the first quarter of 2024 was $4.7 million. compared to net income of $1.4 million in the first quarter of 2023. Reported adjusted EBITDA for the first quarter of 2024 was $29.1 million, compared to $32.3 million for the first quarter of 2023. Adjusted EBITDA margin was 30% for the first quarter of 2024. Reported adjusted net income for the first quarter of 2024 was $16.5 million compared to $19.3 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was 3 cents compared to earnings per share of 1 cent in the first quarter of 2023. Adjusted diluted earnings per share for the first quarter of 2024 was $0.10 compared to $0.12 for the first quarter of last year. Now, moving to the balance sheet, we ended the quarter with $224.8 million of cash and cash equivalents. As of March 31, 2024, we had $287.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows. 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 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 the 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.
spk14: Thank you, John.
spk06: To summarize our message today, we are pleased with our first quarter results. and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology.
spk16: We will now open the line for questions. Operator, can you open the line?
spk15: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk16: Our first question comes from David Winley at Jefferies.
spk21: Hi, good evening. Thanks for taking my question. I wanted to start with a question on the cloud launch. Bill, I think you mentioned 1,500 or something in that neighborhood client portals that you've already established in 15 of the top 30 biopharmas. I wondered if you could add a little more detail to that and then maybe describe, again, you mentioned those top biopharmas, so I'm wondering whether the uptake is more skewed to your larger clients or smaller or across the board? and just basically how that uptake is proceeding and how it matches with your expectations.
spk06: Great. Thanks, David. Appreciate the question. So Sitara Cloud is our first step, well, it's our next step, I would say, towards making the suite of Sitara software products into a true platform. So what we're doing is we're setting this up so that our new launches of products that is how you access them. Uh, and so you'll see, obviously we have a, as you pointed out quite a number of customers who are starting to use it today and that, that will naturally increase, uh, as we go forward and as new releases of products come out where that's really the only way to access the software. Um, we started out to answer your question directly. We started out with some smaller ones just to make sure that, uh, that everything was operational and then we've been migrating to the larger ones. But it should accelerate as we go through the year. We're pretty excited about this because it has a couple of advantages to us. One is it's a way to promote reuse of certain software modules across our platform. So instead of writing them for every product we have, we can write them once and we can use a best-in-class functionality across all of our products. We're also getting to unite the look and feel of our products. And also, this enables us to more easily share data between them. So it also probably has some good marketing advantages in terms of When companies log in, they see which products they have and which products they could have, and we can have a good conversation with them from that standpoint. So we're pretty excited about it. It's kind of the next evolution of our software, and as you pointed out, it's got a good uptake from our customers.
spk21: As a follow-up to that, I believe you've regularly versioned SimSip every year, and I believe that that versioning, and you probably do that on other products, but just calling out SimSip, I believe that versioning drives economics for you. You add capabilities and maybe, you know, get a little bit more, you know, if nothing else, inflationary price. Are those types of economics going to be the same in the cloud hosted products or will that change?
spk06: Yeah. So SimSip, as you pointed out, we launched, we have a new version every year. Some other ones that It's a little bit different. For example, Phoenix, we're moving to an every six-month cycle. So there's certainly an advantage to our economics in terms of each one has additional features and there's a reason to upgrade. Not everybody, I think with the six-month cycle, we'll see maybe people will, people might not do every six months, but they'll sort of be in increasing pressure to do that. You know, in terms of the economics of this, I think a lot of this has to do with, you know, when we had desktop installations, a lot of our customers have to go through expensive software validation projects. And those become less onerous as we move to the cloud, partly because we can do a lot of the work ourselves and we can share that with them. And so we hope also that we'll get that'll also foster more frequent updates as well.
spk21: Got it. And if I could just ask one more on your guidance on the revenue, I believe at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically, a little less than half inorganically. I wondered if you could confirm that that's still your thinking and And could you break out the organic versus inorganic contribution in the first quarter? Thanks. That would be it for me.
spk05: Yeah. Hi, David. So, yeah, on the quarter, we put up 7% revenue growth. And as we said when we first put out the guidance, and we're still confident in that guidance, by the way, but when we first put that out, we said that on the services side, there'd be a bit of a first half, second half story or ramp into the later part of the year. related to that part of the business. So we still anticipate that to be the case. And so Q1, you know, came in line with our expectations. On an organic basis, the deals contributed a few hundred basis points to the growth on the quarter. Okay, great. Thank you.
spk15: Thank you. One moment for our next question.
spk16: Our next question comes from Jeff Garrow at Stevens.
spk07: Hi, good afternoon. Thanks for taking the questions. Maybe a couple from me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I wanted to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start.
spk05: Yeah, on services bookings, We did experience some timing on bookings, but it was actually on the software side more so than it was on the services side. So software booking had some timing that on some large pinnacle deals that were scheduled for March that ended up coming in April. And those have come in and, you know, we don't have any concerns about it. On the services side, though, to your question, The story there is on the Tier 1s, it's more of a tough compare. So if you look back at services bookings, then we have a very large Q1 of 2023 on the services side, and so there's a tough compare there. As you look at the other tiers, though, then the business is still recovering. So our recovery is still in place. So when you look at Tier 2 and Tier 3 bookings, then what we're seeing is sort of stability from where we were in the second half of last year. So if you look at Q3 and then look at Q4 and now Q1 services bookings are kind of in line on a dollar basis with what we were expecting to be the case there. So a little bit of a tough comp is one on pressuring the growth rate, but then from a dollar's perspective and achievement, it's playing out as we expected. with tier ones or the tier two and tier threes, you know, still not back to their historic levels.
spk07: I appreciate the granularity there on customer segmentation. And maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth, how should we think about services bookings or backlog converting to revenue? for the fiscal year. It looked like nice execution on that front here in the first quarter. Should we expect more sequential improvement from here, or does the first quarter represent kind of the right velocity of conversion if we're looking at things from, say, a trailing 12-month services bookings to revenue conversion perspective?
spk05: Right, yeah. So, I mean, look, as far as conversion, then, you know, we're pleased with the conversion. It's on our expectations, so... Backlog, I'd say there's not an unusual amount of backlog conversion, but it is playing out as we thought it would, meaning we have some bookings left over from last year. We're converting those, and the revenue plan played out as we anticipated. As you look forward on bookings, then we are excited about what we're seeing, and as Bill mentioned in the prepared remarks, we're excited about the biotech funding environment and the fact that you know, some of our customers or potential customers are getting funded. But it's really important to note that, you know, we haven't reached the inflection point. We don't see that in the bookings in Q1. We don't see it in the bookings today in Q2. And so, you know, if that's going to play out for us, it's definitely going to be more in the back half of the year. And we haven't seen it yet.
spk14: Fair enough. I'll stop there and jump back in the queue.
spk15: Thank you. One moment for our next question.
spk16: Our next question comes from Luke Sergat at Barclays.
spk22: Great, thanks. I just wanted to follow up on that M&A and kind of get a little bit more specific there and, you know, what the contribution was to each segment in the quarter. You know, as David talked about, you know, what's embedded in guidance. Any changes to those, to what you're expecting for the year?
spk05: No. The guidance, no changes there. You know, we're confident in the range that we have, and Q1 played out in line with our expectations. The M&A contribution, you know, when you look at bookings, it's less than 2% of bookings was related to M&A, so it's really not a material amount. And then as I mentioned earlier, when you look at our 7% reported revenue growth, then there was a contribution of a few hundred basis points. But we haven't split that out on a software services basis.
spk22: Okay, thanks. And then I guess as we're thinking about the guide, I understand the first half, second half catch up. But on the services piece, we've seen the regulatory business be softer for quite a while. And then you're talking about, you know, you had a little softer bookings here in the first quarter. I'm just trying to figure out when that, you know, what kind of visibility you have on the services side to bake in that kind of second half ramp recovery.
spk05: Well, I mean, you know, a key aspect of that is we put together the guidance with the notion of stability, which is what we saw play out on the quarter and it was what we saw in the bookings results for the second half of last year. to get to the higher end of the range, then, you know, we would need to see that inflection point due to any biotech funding that might be out there. And by the way, we are targeting those companies that are gaining funding in those capital markets. We are targeting them from a commercial basis. But again, any activities are really going to be in the second half of the year. Services, so the regulatory business in the meanwhile, as well as our biosim services, especially in the tier two and tier three customer categories, continue to be impacted by the same dynamics that we saw last year. Do we see stability? We do. We're happy about that. We don't see continued decline, but we also don't see acceleration and haven't hit that inflection point yet. Okay. That's helpful. Thank you.
spk15: Thank you. One moment for our next question.
spk16: Our next question comes from Michael Ricekin at BOFA.
spk24: Great. Thanks for taking the question. I want to go back to the bookings in the quarter. I know you called out a couple times the strong or the elevated comp in services bookings. I mean, I think it's elevated on a dollars basis, but on a percent basis, it was only up 4% last year. So just trying to parse out a little bit on that. You know, is the seasonality on that expected to be a little bit different? Or put another way, if I look at services bookings, you know, last year it's, you know, $82 million in one queue and then $50, $57, $75 the rest of the year. So sort of a big step down and then ramping down through the rest of the year. Are you expecting a little bit of a more spread out seasonality there? You know, I know it's tough to talk about bookings ahead of time, but just trying to reconcile that, you know, trailing 12-month bookings growth and the 1.1 book-to-bill with, like you said, some expectations for pretty steady revenue growth this year. Thanks.
spk05: Yeah. Hi, Mike. So what we typically see is we do typically see a Q2 that's lower than Q1. So to your point, that seasonality and that typical seasonality, there's not, especially given that the end market environment is has really not changed, then there's no reason to think that that typical seasonality wouldn't continue to play out the way that it has. So that's probably the best indication that we can give.
spk04: Sorry, go ahead.
spk24: No, I was going to say, just to clarify, yes, there's usually a step down, but last year there was a very sharp step down. from 82 to 50. I think this year, is it safe to say that you expect less of a step down? And that last year, 1Q was just elevated in dollar terms?
spk05: I'm just trying to think about services. Yeah, the answer to that is yes. The step down last year was unusual. And then from that point forward, we saw some recovery and stability. And so even though we do anticipate some level of seasonality, what I would say happened last year versus what you saw in other years was unusually large of a step down. And sitting here in May, we don't anticipate that we'd see that level because once we stepped down there, then we started to see recovery into Q3. We saw some acceleration into Q4. And now Q1 of 2024 has played out in line with our expectations. Okay. And then the other thing to add to that, I guess, is really if you look at the years before 2023, if you look at 2021 or 2022, then that's what we would point to as more sort of typical seasonality.
spk24: Okay. All right. Fair enough. And then I guess sort of the second part of that question would be on the book-to-bill, you know, using a trailing 12-month, you know, I think it's 1.1 this quarter. For most of the last year, it was in sort of like the 1.15. And then prior years, it was more of, you know, 1.18, 1.2. So a little bit lower than it's been in prior years. Is that just sort of like catching up to the softer bookings you saw last year? I mean, is it fair to say that you expect that to reaccelerate back into the 1.2 range as we exit the year?
spk05: yeah we do expect acceleration over time but it's you know we need to see uh some of the customer and end market behavior uh recover as well we have keep in mind you know we we exited the year at 1.1 we're in in q3 of last year we were at at 1-1 so we continue to be at 1-1 as a spot that uh you know we haven't yet seen an inflection point in the end market customers so
spk06: Michael, I think you're talking about software a little bit. So in Q1, our software bookings were a little bit less than we expected because we had some bookings move into April. We did actually get those. So we're feeling pretty confident that the bookings are appropriate for what we're giving you in our outlook for the year. Okay. All right. Thank you.
spk15: Thank you.
spk16: One moment for our next question. Our next question comes from Max Smock at William Blair.
spk11: Hey, good afternoon, guys. Thanks for taking our questions. I wanted to follow up on Luke's question earlier about inorganic bookings. And I might have missed her, but I think you said in total inorganic bookings are around 2% of total bookings, which... implies something about $2 million in total for the quarter here. And coming into this year, you talked about those two recently acquired businesses contributing mid-single digits to growth, which I think implies, based on our model, around $18 million in revenue in 2024 in total. So I guess my follow-up would be, was the $2 million in bookings from the recent acquisitions in line with your expectations? And then given that small bookings number, are you still as confident in that mid-single digit organic contribution in 2024 as you were earlier this year?
spk05: Hi, Max. Yes. Yeah, so we are. The first quarter, to your question, did play out as we expected it to. So not a huge contribution in bookings from the acquired companies from the Q4 closure of the deal. We'd expect that to accelerate as we move the year. So I'd say that Q1 played out as we thought, and we're still confident in the guidance message that we gave with both the reported and then the organic ranges.
spk13: Understood. Thank you. And then maybe one on budget flush here.
spk11: So last year, you had some clients that came to you, hadn't necessarily cut their budget, but hadn't spent their budget either. So you had some benefit there at the end of the year. Just wondering, based on your conversation so far this year, it sounds like things are getting better, but not necessarily translating to orders. How do you think about the potential for that budget flush to occur next? at the very end of this year, similar to what you saw last year? And what would that mean for your results relative to the 2024 guide that you've reiterated today?
spk05: Well, you know, in our guide, we did anticipate some seasonality. And I think that part of that seasonality is the budget flush dynamic, which typically makes our Q4s stronger on bookings than the other quarters of the year. I'd tell you that as we put together our plan, We did anticipate that that would be the case. We saw that be the case in Q4 of last year, as we did in years prior as well. So what's cooked into the guidance range is the anticipation that we see a somewhat typical functionality that we've seen in the business in the past.
spk13: Got it. Thank you both again for taking our questions.
spk03: Thanks, Max.
spk13: Thank you.
spk16: One moment for our next question. Our next question comes from Steve Deckard at KeyBank.
spk10: Hey, guys. Thanks for taking our questions. With the nice increase in software revenues in the first quarter, is there a certain reason you didn't see more of an expansion in your margins given software is your higher margin business? And then, do you provide more color on the strength you're seeing in your software bookings and revenues? Thanks.
spk05: Yeah, sure. Yeah, we're pleased. Software growth on the quarter was 19%. The net retention ratio was 114%. So we're pleased with the continued execution by the software team. As we exited last year, we were in a good spot. We saw that continue and accelerate into Q1. As far as the margin is concerned, on the quarter, we had a 30.2% adjusted EBITDA margin. And while that margin was below our full year guidance range of 31 to 33%, it was impacted about 200 basis points by the newly acquired companies that we just closed in Q4, including one in December. So as we work through that, then we're expecting some margin lift. But what I'd tell you is the software achievement During the quarter fell through with a typical margin And then that was you know, that was that would have been partially offset by some of the dynamics that I just described One moment for next question
spk16: Our next question comes from Cal Cruz at UBS.
spk09: Hello. Thank you for taking the questions. Maybe if we could dive a little bit more into the margin. It sounded like a lot of the increase in cost was also associated with additional employee expenses. So maybe if you could provide more detail on how we should think about margins playing out throughout the rest of the year, keeping in mind, you know, the impact of acquisitions and hiring.
spk05: Right. So full-year margin guidance is 31% to 33% on the quarter, as I just mentioned, is 30.2%. So it's below the full-year range primarily because, well, two things. One, you saw that expenses were up. I'll come to that in a moment. But two is, you know, we're still integrating the deals that we just closed in Q4. So that pressured the margin a bit in Q1, and we think that'll resolve as we continue and finalize integrations there. The other thing, though, is you're asking about investments or you're asking about cost increases. What they are is investments. So we laid out our plan around investing in the business during 2024. And of course, we're executing on that plan. As a reminder, that was centered in two areas. It was investments in sales and marketing in expanding the sales force. And it was investments in R&D, which was adding software developers to our team to continue to enhance our software programs, including embedding AI in all of our product offerings. So that is what you see playing out in the quarter. And you'll continue to see those investments during the course of the year. You asked about margin progression. We do anticipate, as I mentioned earlier, some dynamic that will drive revenue to be higher in the second half than in the first half, which is typical for the company when you look back at prior year periods, and that will help margin acceleration and accretion to that margin, as well as finalizing the integration on the deal.
spk15: Thank you. One moment for our next question. Constantine Davides at Citizens JMP.
spk26: Thanks. I just wanted to double-click quickly into the funding backdrop. We saw a pretty fairly significant spike in the first quarter funding activity. I'm just wondering, are you surprised you aren't seeing that inflection yet? Or is this, I guess, relative to prior cycles you've experienced fairly normal in terms of what you think the timing will be between when funding picks up and when it might translate into bookings?
spk06: Yeah, thanks for the question. Yeah, no, we didn't expect to see an immediate increase in bookings from funding. It really, you know, started, you know, from what we read, you know, kind of started in February and moved into March. You know, we think it takes typically several months before that will typically start to get through to us, which is why we've indicated that, you know, we're a little bit more optimistic for the second half and the first half.
spk05: But to be clear, too, any tailwinds related to the funding environment are not included in the guidance. We guided from a stability standpoint for the year.
spk25: Got it. Thanks. And then I guess just a follow-up on the
spk26: sort of some of the investments. Can you give us a sense of, on the Salesforce, where it stands currently and kind of how much you want to scale that this year? And then I know you made some changes last year in terms of how you structure and organize the Salesforce. I'm wondering what some of the early returns are with those measures, whether it's, you know, win rates or attach rates or anything else you'd like to call out.
spk02: Thank you.
spk06: Um, so last year we, yeah, we, we made some changes to unify our commercial organization, uh, so that we could sell products from across all of Sertara to our customers who are typically buying more than one. So it was a more efficient way of reaching them and, uh, Our belief was that we would see more cross, effectively what you'd call cross-selling, but in terms of more customers buying a bigger range of products. And also that we would become more efficient over time as well because we were, particularly in services, we still had a lot of the seller-doer model where we were taking fairly expensive technical services people away from billable work and tasking them with the sales process. So I would say that we're very pleased with how far we've gotten on this, but there's still more to go. We're probably a bit farther ahead in terms of what we've done on the software side, just because we started that earlier. And there's been an opportunity, I think, that we've taken into account over the last two quarters to really do some solid training of the sales force of the entire range of Sertara's products. We've done a lot to professionalize just how we're covering the world in terms of sales territories and assigning key accounts to the appropriate salespeople. And we started to see some benefits of that in the first quarter. But like I said, I don't think we're at full strength there, so we'll see some further benefits as we move through the year and kind of pull that team together even more than it is right now.
spk16: One moment for our next question. Our next question comes from Vikram Parlihit at Morgan Stanley.
spk20: Hi, everyone. This is the Gospel for Vikram. We have one question, and so that is, with the 1Q behind you now, what do you think drives the bookend of revenue and EPS guidance for 2024?
spk05: So the guidance on the year remains the same. Q1 played out in line with our expectations and our plan. So, you know, the guidance that we had laid out before, which was reported revenue growth of 9% to 13% on an organic basis, mid-single digit, remains intact. The other piece of that, of course, we've talked about the margin a bit, is that we're committed to growing EBITDA dollars on the year. and uh and the margin would would land in the 31 to 33 percent range so uh so nothing has really changed that from from this point um if we were i think what you're saying is what takes you the higher what takes you the low end um you know to get to the to the lower end here we would need some deterioration in the end markets which we're not seeing, to be clear. So, you know, we talk about stability a lot in Q3, Q4 of last year, and now through Q1 of 2024. We've continued to see that. So we're not really seeing that as playing out. But to get to the bottom end of the range, that's what would need to happen is we'd need to see some deterioration from the spot where we are now, meaning in Tier 2 and Tier 3s and Tier 1s, for that matter, as well. We're not seeing that. To get to the high end of the range, then we would need to see some acceleration. As I mentioned, we have not baked into our guidance the notion of any benefit related to the biotech funding environment. That's not in our guidance. So obviously, if we start to get some benefit there, it would start to take us to the higher end of our range. And if we continue to see acceleration, the software performance has been been really solid. We've been very pleased with it. If we continue to see acceleration, thanks to the many new products that we're offering on the software side, that too would start to take us more to the higher end of the range.
spk16: Thank you very much.
spk15: I am showing no further questions at this time. I would now like to turn back the call over to Bill for closing remarks.
spk06: Thank you everybody for joining us tonight. We, as we said, we remain very optimistic for the rest of the year. We had a lot of good things happen in the quarter and we'll look forward to reporting at the end of this quarter at the same time, same place.
spk16: Thanks. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. you Thank you. Thank you.
spk19: Thank you.
spk15: Good day, and thank you for standing by. Welcome to the Sitara First Quarter 2024 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 this 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, please 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 first speaker today, David Duclair.
spk08: 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 March 31, 2024. 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 website. In their remarks and 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 press release available on the company's website. Please refer to the reconciliation tables and the company materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Sartara 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'll turn the call over to William.
spk06: Thank you, David. Good afternoon, everyone. Thank you for joining Sartara's first quarter earnings call. John and I will start with prepared remarks, and then we will take your questions. Throughout the first quarter, Certara built upon the solid business momentum observed in the fourth quarter of 2023. We're pleased with our start to the year, delivering total revenue of $96.7 million, representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI-enhanced products continues to grow following the acquisition of Vyasa just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, TAR's products and services remain top of mind. We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R&D initiatives. Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, It will take time for funding to translate into bookings and sales at Sertara, and we have not yet seen an inflection point in activity through the first several months of the year. Internally, our focus remains on several key initiatives that will drive Sertara's next stage of growth. On our last earnings call, we highlighted the investments we are targeting in 2024, including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities. We are dedicated to unifying our organization, both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, the unifying platform that integrates access to our entire software suite of applications. Certara Cloud will make our software solutions easier to navigate across each user's organization and with external parties, enabling collaboration across different workflows. Sitara Cloud already has 1,500 client-specific portals, and it's currently used by 15 of the top 30 biopharmaceutical companies. Investments like Sitara Cloud and other initiatives underway are designed to ease access to the Sitara platform, improve data and information security, and deliver enhanced capabilities to customers. I am proud of the work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now turning to the performance of the business, in the first quarter, we delivered software revenue of $39.3 million, representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry-leading Simpsons, Phoenix, and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix-hosted, which is a cloud-based version of the product. With cloud computing integrated into Phoenix, customers will have immediate access to upgrades, remote workflow processing, and improved performance and run times. Customer uptake continued to progress nicely, and we are pleased by the feedback we have received to date. Throughout the quarter, our software team also began to accelerate the development of co-authors. a regulatory writing tool that uses AI and machine learning to draft regulatory submissions. The next version of co-author will be officially launched at the end of the second quarter, and early versions are in use by our internal regulatory writing team on customer projects. Over time, co-author will drive efficiencies across different regulatory writing processes, and we have received significant interest from customers. Our technology-driven services segment delivered revenue of $57.3 million in the first quarter, which was flat year over year on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious customer spending in 2023. In the first few months of the year, we have been encouraged by customer discussions across our services group. The CHAR's ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable, and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements. In conclusion, Patara is in a strong position to grow in 2024, headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for biostimulation, while also making our products easier to use. I'm confident in our ability to meet our 2024 goals, and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.
spk05: Thank you, William. Hello, everyone. Total revenue for the three months ended March 31st, 2024 was $96.7 million, representing year-over-year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39.3 million in the first quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. Rattable and subscription revenue accounted for 61% of first quarter software revenues, up from 56% in the prior year period. Software bookings were $33.1 million in the first quarter, which increased 8% from the prior year period. Trailing 12-month software bookings were $139.5 million, up 11% year over year. In the first quarter, the software net retention rate was 114%, which is consistent with our long-term growth profile. Now, turning to services revenue, which was $57.3 million in the first quarter, flat versus the prior year period on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. Technology-driven services bookings for the first quarter were $72.7 million, which decreased 11% from the prior year period. Trailing 12-month services bookings were $256 million, also down 11% as compared to the prior year. Total cost of revenue for the first quarter of 2024 was $39.3 million, an increase from $34.9 million in the first quarter of 2023, primarily due to a $1.9 million increase in employee-related expenses, a $1.2 million increase in stock-based compensation, and a $0.8 million increase in software amortization. Total operating expenses for the first quarter of 2024 were $58.7 million, an increase from $48 million in the first quarter of 2023. The components of operating expenses are as follows. Sales and marketing expenses were $10.7 million compared to $8 million in the first quarter of 2023. This increase is primarily due to a $1.7 million increase in employee-related expenses due to the expansion of the sales force. R&D expenses were $12 million compared to $9.3 million for the first quarter of 2023. R&D expenses were up primarily due to a $3 million increase in employee-related costs as we grew our team of software developers. G&A expenses were $23 million compared to $19.8 million for the first quarter of 2023. The increase was due to a $1.6 million change in contingent consideration, primarily related to the acquisition of Viasa, and a $1.1 million increase in employee-related expenses, partially offset by a $0.9 million decrease in stock-based compensation. Intangible asset amortization was $12.6 million compared to $10.5 million in the first quarter of 2023. Depreciation and amortization expense was $0.4 million flat with last year. Continuing down the P&L, interest expense was $5.8 million compared to $5.5 million for the first quarter of 2023 due to higher interest on the floating rate portion of our term loan. Miscellaneous income was $1.6 million compared to $0.5 million in the first quarter of 2023, primarily related to the return on our cash invested. Income tax was a benefit of $0.8 million compared to an expense of $1.1 million for the first quarter of 2023. Net loss for the first quarter of 2024 was $4.7 million. compared to net income of $1.4 million in the first quarter of 2023. Reported adjusted EBITDA for the first quarter of 2024 was $29.1 million, compared to $32.3 million for the first quarter of 2023. Adjusted EBITDA margin was 30% for the first quarter of 2024. Reported adjusted net income for the first quarter of 2024 was $16.5 million compared to $19.3 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was 3 cents compared to earnings per share of 1 cent in the first quarter of 2023. Adjusted diluted earnings per share for the first quarter of 2024 was $0.10 compared to $0.12 for the first quarter of last year. Now, moving to the balance sheet, we ended the quarter with $224.8 million of cash and cash equivalents. As of March 31, 2024, we had $287.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows. 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 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 the 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.
spk14: Thank you, John.
spk06: To summarize our message today, we are pleased with our first quarter results. and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology.
spk16: We will now open the line for questions. Operator, can you open the line? Thank you.
spk15: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk16: Our first question comes from David Winley at Jefferies.
spk21: Hi, good evening. Thanks for taking my question. I wanted to start with a question on the cloud launch. Bill, I think you mentioned 1,500 or something in that neighborhood client portals that you've already established in 15 of the top 30 biopharmas. I wondered if you could add a little more detail to that and then maybe describe, again, you mentioned those top biopharmas, so I'm wondering whether the uptake is more skewed to your larger clients or smaller or across the board? and just basically how that uptake is proceeding and how it matches with your expectations.
spk06: Great. Thanks, David. Appreciate the question. So Sitara Cloud is our first step, well, it's our next step, I would say, towards making the suite of Sitara software products into a true platform. So what we're doing is we're setting this up so that our new launches of products That is how you access them. And so you'll see, obviously, we have, as you pointed out, quite a number of customers who are starting to use it today. And that will naturally increase as we go forward and as new releases of products come out where that's really the only way to access the software. We started out, to answer your question directly, we started out with some smaller ones just to make sure that... you know, that everything was operational and then we've been migrating to the larger ones. But it should accelerate as we go through the year. We're pretty excited about this because it has a couple of advantages to us. One is it's a way to promote reuse of certain software modules across our platform. So instead of writing them for every product we have, we can write them once and we can use a best-in-class functionality across all of our products. We're also getting to unite the look and feel of our products. And also, this enables us to more easily share data between them. So it also probably has some good marketing advantages in terms of When companies log in, they see which products they have and which products they could have, and we can have a good conversation with them from that standpoint. So we're pretty excited about it. It's kind of the next evolution of our software, and as you pointed out, it's got a good uptake from our customers.
spk21: As a follow-up to that, I believe you've regularly versioned SimSip every year, and I believe that that versioning, and you probably do that on other products, but just calling out SimSip, I believe that versioning drives economics for you. You add capabilities and maybe, you know, get a little bit more, you know, if nothing else, inflationary price. Are those types of economics going to be the same in the cloud-hosted products, or will that change?
spk06: Yeah, so SimSip, as you pointed out, we have a new version every year. Some other ones, it's It's a little bit different. For example, Phoenix, we're moving to an every six-month cycle. So there's certainly an advantage to our economics in terms of each one has additional features and there's a reason to upgrade. Not everybody, I think with the six-month cycle, we'll see maybe people will, people might not do every six months, but they'll sort of be in increasing pressure to do that. You know, in terms of the economics of this, I think a lot of this has to do with, you know, when we had desktop installations, a lot of our customers have to go through expensive software validation projects. And those become less onerous as we move to the cloud, partly because we can do a lot of the work ourselves and we can share that with them. And so we hope also that we'll get that'll also foster more frequent updates as well.
spk21: Got it. And if I could just ask one more on your guidance on the revenue, I believe at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically, a little less than half inorganically. I wondered if you could confirm that that's still your thinking and And could you break out the organic versus inorganic contribution in the first quarter? Thanks. That would be it for me.
spk05: Yeah. Hi, David. So, yeah, on the quarter, we put up 7% revenue growth. And as we said when we first put out the guidance, and we're still confident in that guidance, by the way, but when we first put that out, we said that on the services side, there'd be a bit of a first half, second half story or a ramp into the later part of the year. related to that part of the business. So we still anticipate that to be the case. And so Q1, you know, came in line with our expectations. On an organic basis, the deals contributed a few hundred basis points to the growth on the quarter. Okay, great. Thank you.
spk15: Thank you. One moment for our next question.
spk16: Our next question comes from Jeff Garrow at Stevens.
spk07: Hi, good afternoon. Thanks for taking the questions. Maybe a couple from me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I want to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start.
spk05: Yeah, on services bookings, We did experience some timing on bookings, but it was actually on the software side more so than it was on the services side. So software bookings had some timing that on some large pinnacle deals that were scheduled for March that ended up coming in April, and those have come in, and we don't have any concerns about it. On the services side, though, to your question, The story there is on the Tier 1s, it's more of a tough compare. So if you look back at services bookings, then we have a very large Q1 of 2023 on the services side, and so there's a tough compare there. As you look at the other tiers, though, then the business is still recovering. So our recovery is still in place. So when you look at Tier 2 and Tier 3 bookings, then what we're seeing is sort of stability from where we were in the second half of last year. So if you look at Q3 and then look at Q4 and now Q1 services bookings are kind of in line on a dollar basis with what we were expecting to be the case there. So a little bit of a tough comp is one on pressuring the growth rate, but then from a dollar's perspective and achievement, it's playing out as we expected. with tier ones or the tier two and tier threes, you know, still not back to their historic levels.
spk07: I appreciate the granularity there on customer segmentation. And maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth, how should we think about services bookings or backlog converting to revenue? for the fiscal year it looked like nice execution on that front here in the first quarter should we expect more sequential improvement from here or does does the first quarter represent kind of the the right velocity of conversion if we're looking at things from say a trailing 12-month services bookings to revenue conversion perspective right yeah so i mean look as far as conversion then you know we're pleased with the conversion it's on our expectations so
spk05: um backlog i'd say there's not an unusual amount of backlog conversion but it is playing out as we thought it would with meaning we have some bookings left over from last year we're converting those and you know the revenue plan played out as as we anticipated um as you look forward on bookings then uh you know we we are excited about you know what we're seeing and as bill mentioned in the prepared remarks we're excited about the biotech funding environment and the fact that you know, some of our customers or potential customers are getting funded. But it's really important to note that, you know, we haven't reached the inflection point. We don't see that in the bookings in Q1. We don't see it in the bookings today in Q2. And so, you know, if that's going to play out for us, it's definitely going to be more in the back half of the year. And we haven't seen it yet.
spk14: Fair enough. I'll stop there and jump back in the queue.
spk15: Thank you.
spk16: One moment for our next question. Our next question comes from Luke Sergat at Barclays.
spk22: Great, thanks. I just wanted to follow up on that M&A and kind of get a little bit more specific there and, you know, what the contribution was to each segment in the quarter. You know, as David talked about, you know, what's embedded in guidance. Any changes to those, to what you're expecting for the year?
spk05: No. The guidance, no changes there. You know, we're confident in the range that we have, and Q1 played out in line with our expectations. The M&A contribution, you know, when you look at bookings, it's less than 2% of bookings was related to M&A, so it's really not a material amount. And then as I mentioned earlier, when you look at our 7% reported revenue growth, then there was a contribution of a few hundred basis points. But we haven't split that out on a software services basis.
spk22: Okay, thanks. And then I guess as we're thinking about the guide, I understand the first half, second half catch up. But on the services piece, we've seen the regulatory business be softer for quite a while. And then you're talking about, you know, you had a little softer bookings here in the first quarter. I'm just trying to figure out when that, you know, what kind of visibility you have on the services side as that to bake in that kind of second half ramp recovery.
spk05: Well, I mean, you know, a key aspect of that is we put together the guidance with the notion of stability, which is what we saw play out on the quarter and it was what we saw in the bookings results for the second half of last year. to get to the higher end of the range, then, you know, we would need to see that inflection point due to any biotech funding that might be out there. And by the way, we are targeting those companies that are gaining funding in those capital markets. We are targeting them from a commercial basis. But again, any activities are really going to be in the second half of the year. Services, so the regulatory business in the meanwhile, as well as our biosim services, especially in the tier two and tier three customer categories, continue to be impacted by the same dynamics that we saw last year. Do we see stability? We do. We're happy about that. We don't see continued decline, but we also don't see acceleration and haven't hit that inflection point yet. Okay. That's helpful. Thank you.
spk15: Thank you.
spk16: One moment for our next question. Our next question comes from Michael Ricekin at BOFA.
spk24: Great. Thanks for taking the question. I want to go back to the bookings in the quarter. I know you called out a couple times the strong or the elevated comp in services bookings. I mean, I think it's elevated on a dollars basis, but on a percent basis, it was only up 4% last year. So just trying to parse out a little bit on You know, is the seasonality on that expected to be a little bit different? Or put another way, if I look at services bookings, you know, last year it's, you know, $82 million in one queue and then $50, $57, $75 the rest of the year. So sort of a big step down and then ramping down through the rest of the year. Are you expecting a little bit of a more spread out seasonality there? You know, I know it's tough to talk about bookings ahead of time, but just trying to reconcile that, you know, trailing 12-month bookings growth and the 1.1 book-to-bill with, like you said, some expectations for pretty steady revenue growth this year. Thanks.
spk05: Yeah. Hi, Mike. So what we typically see is we do typically see a Q2 that's lower than Q1. So to your point, that seasonality and that typical seasonality, there's not, especially given that the end market environment is has really not changed, then there's no reason to think that that typical seasonality wouldn't continue to play out the way that it has. So that's probably the best indication that we can give.
spk04: Sorry, go ahead.
spk24: No, I was going to say, just to clarify, yes, there's usually a step down, but last year there was a very sharp step down. from 82 to 50? I think this year, is it safe to say that you expect less of a step down? And then last year, 1Q was just elevated in dollar terms?
spk05: I'm just trying to think about services. Yeah, the answer to that is yes. The step down last year was unusual. And then from that point forward, we saw some recovery and stability. And so even though we do You know, we do anticipate some level of seasonality at what I would say happened last year versus what you saw in other years was unusually large of a step down. And, you know, sitting here in May, we don't anticipate that we'd see that level because we, you know, once we stepped down there, then we started to see recovery in the Q3. We saw some acceleration into Q4 and now Q1 of 2024. has played out in line with our expectations. Okay. And then just sort of the other, the other, the other thing to add to that, I guess, is the really, if you look at the year, if you look at the years before 2023, if you look at 2021 or 2022, then that that's what we would point to as more sort of typical seasonality.
spk24: Okay. All right. Fair enough. And then I guess sort of the second part of that question would be on, um, the book to bill, um, You know, using a trailing 12-month, you know, I think it's 1.1 this quarter. For most of the last year, it was in sort of like the 1.15. And then prior years, it was more of, you know, 1.18, 1.2. So a little bit lower than it's been in prior years. Is that just sort of like catching up to the softer bookings you saw last year? I mean, is it fair to say that you expect that to reaccelerate back into the 1.2 range as we exit the year?
spk05: yeah we do expect acceleration over time but it's you know we need to see uh some of the customer and end market behavior uh recover as well we have keep in mind you know we we exited the year at 1.1 we're in in q3 of last year we were at at 1-1 so we continue to be at 1-1 as a spot that uh you know we haven't yet seen an inflection point in the end market customers so
spk06: Michael, I think you're talking about software a little bit. So in Q1, our software bookings were a little bit less than we expected because we had some bookings move into April. We did actually get those. So we're feeling pretty confident that the bookings are appropriate for what we're giving you in our outlook for the year.
spk11: okay all right thank you thank you one moment for our next question our next question comes from max smock at william blair hey good afternoon guys thanks for taking our questions i wanted to follow up on luke's question earlier about inorganic bookings and i might have missed her but i think you said in total inorganic bookings are around two percent of total bookings which implies something about $2 million in total for the quarter here. And coming into this year, you talked about those two recently acquired businesses contributing mid-single digits to growth, which I think implies, based on our model, around $18 million in revenue in 2024 in total. So I guess my follow-up would be, was the $2 million in bookings from the recent acquisitions in line with your expectations? And then given that small bookings number, are you still as confident in that mid-single digit organic contribution in 2024 as you were earlier this year?
spk05: Hi, Max. Yes. Yeah, so we are. You know, the first quarter to your question did play out as we expected it to. So not a huge contribution in bookings from the acquired companies from the Q4 closure of the deal. We'd expect that to accelerate as we move the year. So I'd say that Q1 played out as we thought, and we're still confident in the guidance message that we gave with both the reported and then the organic ranges.
spk13: Understood. Thank you. And then maybe one on budget flush here.
spk11: So last year, you had some clients that came to you, hadn't necessarily cut their budget, but hadn't spent their budget either. So you had some benefit there at the end of the year. Just wondering, based on your conversation so far this year, it sounds like things are getting better, but not necessarily translating to orders. How do you think about the potential for that budget flush to occur next? at the very end of this year, similar to what you saw last year? And what would that mean for your results relative to the 2024 guide that you've reiterated today?
spk05: Well, you know, in our guide, we did anticipate some seasonality, and I think that part of that seasonality is the budget flush dynamic, which typically makes our Q4s stronger on bookings than the other quarters of the year. I'd tell you that as we put together our plan, We did anticipate that that would be the case. We saw that be the case in Q4 of last year, as we did in years prior as well. So what's cooked into the guidance range is the anticipation that we see a somewhat typical functionality that we've seen in the business in the past.
spk13: Got it. Thank you both again for taking our questions.
spk03: Thanks, Max.
spk13: Thank you.
spk16: One moment for our next question. Our next question comes from Steve Deckard at KeyBank.
spk10: Hey, guys. Thanks for taking our questions. With the nice increase in software revenues in the first quarter, was there a certain reason you didn't see more of an expansion in your margins given software is your higher margin business? And then, do you provide more color on the strength you're seeing in your software bookings and revenues? Thanks.
spk05: Yeah, sure. Yeah, we're pleased. Software growth on the quarter was 19%. The net retention ratio was 114%. So we're pleased with the continued execution by the software team. As we exited last year, we were in a good spot. We saw that continue and accelerate into Q1. As far as the margin is concerned, on the quarter, we had a 30.2% adjusted EBITDA margin. And while that margin was below our full year guidance range of 31 to 33%, it was impacted about 200 basis points by the newly acquired companies that we just closed in Q4, including one in December. So as we work through that, then we're expecting some margin lift. But what I'd tell you is the software achievement During the quarter fell through with the typical margin And then that was you know, that was that would have been partially offset by some of the dynamics that I just described One moment for next question
spk16: Our next question comes from Cal Cruz at UBS. Hello.
spk09: Thank you for taking the questions. Maybe if we could dive a little bit more into the margin. It sounded like a lot of the increase in cost was also associated with additional employee expenses. So maybe if you could provide more detail on how we should think about margins playing out throughout the rest of the year, keeping in mind, you know, the impact of acquisitions and hiring.
spk05: Right. So full-year margin guidance is 31% to 33% on the quarter, as I just mentioned, is 30.2%. So it's below the full-year range primarily because, well, two things. One, you saw that expenses were up. I'll come to that in a moment. But two is, you know, we're still integrating the deals that we just closed in Q4. So that pressured the margin a bit in Q1, and we think that'll resolve as we continue and finalize integrations there. The other thing, though, is you're asking about investments or you're asking about cost increases. What they are is investments. So we laid out our plan around investing in the business during 2024. And of course, we're executing on that plan. As a reminder, that was centered in two areas. It was investments in sales and marketing in expanding the sales force. And it was investments in R&D, which was adding software developers to our team to continue to enhance our software programs, including embedding AI in all of our product offerings. So that is what you see playing out in the quarter. And you'll continue to see those investments during the course of the year. You asked about margin progression. We do anticipate, as I mentioned earlier, some dynamic that will drive revenue to be higher in the second half than in the first half, which is typical for the company when you look back at prior year periods, and that will help margin acceleration and accretion to that margin, as well as finalizing the integration on the deal.
spk19: Thank you.
spk15: One moment for our next question. Do we have the correct pronunciation of your name? Constantine Davides at Citizens JMP.
spk26: Thanks. I just wanted to double-click quickly into the funding backdrop. We saw a pretty fairly significant spike in the first quarter funding activity. I'm just wondering, are you surprised you aren't seeing that inflection yet, or is this, I guess, relative to prior cycles you've experienced fairly normal in terms of what you think the timing will be between when funding picks up and when it might translate into bookings?
spk06: Yeah, thanks for the question. Yeah, no, we didn't expect to see an immediate increase in bookings from funding. It really, you know, started, you know, from what we read, you know, kind of started in February and moved into March. You know, we think it takes typically several months before that will typically start to get through to us, which is why we've indicated that we're a little bit more optimistic for the second half and the first half.
spk05: But to be clear, too, any tailwinds related to the funding environment are not included in the guidance. We guide it from a stability standpoint for the year.
spk25: Got it. Thanks. And then I guess just a follow-up on the
spk26: sort of some of the investments. Can you give us a sense of on the sales force where it stands currently and kind of how much you want to scale that this year? And then I know you made some changes last year in terms of how you structure and organize the sales force. I'm wondering what some of the early returns are with those measures, whether it's, you know, win rates or attach rates or anything else you'd like to call out.
spk02: Thank you.
spk06: Um, so last year we, yeah, we, we made some changes to unify our commercial organization, uh, so that we could sell products from across all of Sertara to our customers who are typically buying more than one. So it was a more efficient way of reaching them and, uh, Our belief was that we would see more cross, effectively what you'd call cross-selling, but in terms of, you know, more customers buying a bigger range of products. And also that we would become more efficient over time as well because we were, particularly in services, we still had a lot of the seller-doer model where we were taking, you know, fairly expensive products you know, technical people away from billable work and tasking them with the sales process. So I would say that we're very pleased with how far we've gotten on this, but there's still more to go. We're probably a bit farther ahead in terms of what we've done on the software side, just because we started that earlier. And, uh, you know, there's an, there's been an opportunity, I think, uh, that we've taken into account over the last, you know, two quarters to really, uh, do some solid training of the Salesforce of the entire range of Sartar's products. Uh, we've done a lot to professionalize, uh, just how we're covering the world in terms of sales territories and, and, uh, And assigning, you know, key accounts to the appropriate salespeople. And we started to see some benefits of that in the first quarter. But like I said, I don't think we're fully, you know, at full strength there. So we're, you know, we'll see some further benefits as we move through the year and kind of pull that team together even more than it is right now.
spk16: One moment for our next question. Our next question comes from Vikram Parlihit at Morgan Stanley.
spk20: Hi, everyone. This is the Gospel for Vikram. We have one question, and so that is with the one queue behind you now, What do you think drives the bookend of revenue and EPS guidance for 2024?
spk05: So the guidance on the year remains the same. Q1 played out in line with our expectations and our plan. So, you know, the guidance that we had laid out before, which was reported revenue growth of 9% to 13%, on an organic basis, mid-single digit, remains intact. The other piece of that, of course, we've talked about the margin a bit, is that we're committed to growing EBITDA dollars on the year. And the margin would land in the 31% to 33% range. So nothing has really changed that from this point. I think what you're saying is what takes you to the high or what takes you to the low end. To get to the lower end here, we would need some deterioration in the end markets, which we're not seeing, to be clear. We talk about stability a lot in Q3, Q4 of last year, and now through Q1 of 2024. We've continued to see that, so We're not really seeing that as playing out, but to get to the bottom end of the range, that's what would need to happen is we'd need to see some deterioration from the spot where we are now, meaning in tier two and tier threes and tier ones for that matter as well. We're not seeing that. To get to the high end of the range, then we would need to see some acceleration. As I mentioned, we have not baked into our guidance The notion that of any benefit related to the biotech funding environment, that's not in our guidance. So obviously, if we start to get some benefit there, it would start to take us to the higher end of our range. And if we continue to see acceleration, the software performance has been really solid. We've been very pleased with it. If we continue to see acceleration, thanks to the many new products that we're offering on the software side, that too would would start to take us more to the higher end of the range.
spk16: Thank you very much.
spk15: I am showing no further questions at this time. I would now like to turn back the call over to Bill for closing remarks.
spk06: Thank you, everybody, for joining us tonight. As we said, we remain very optimistic for the rest of the year. We had a lot of good things happen in the quarter and we'll look forward to reporting at the end of this quarter at the same time, same place.
spk16: Thanks. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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