Certara, Inc.

Good day and thank you for standing by. Welcome to the Sertara First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, 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 speaker today. David Dyckler, Investor Relations, please go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the conference, 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, 2025. 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 fall that include forward-looking statements, and actual results in a different material 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 the remarks and responses to questions, management mentioned some non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 5th, 2025. Sertara disclaims any obligation except it's required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will turn the call over to William.

Thank you, David. Good afternoon, everyone. Thank you for joining Sertara's first quarter earnings call. John and I will begin with prepared remarks, and then we will take your questions. We are pleased with our start to the year, delivering financial results consistent with our expectations driven by strong commercial execution across both software and services. We finished the first quarter with revenue of 106.0 million, representing 10% reported growth versus the first quarter of 2024. Sertara's first quarter bookings of $118.2 million represented 12% reported growth versus the prior year period, driven by software bookings growth of 23% and services bookings growth of 7%. Additionally, we continue to see good performance from Chemaxon, which contributed $5.9 million of revenue and $4.9 million of bookings in the quarter. The current market has both continued headwinds that we've been managing over the past couple of years, as well as some new and exciting tailwinds for Sertara. Continued headwinds include the downstream effects of IRA price controls, an erratic capital raising environment for biotechs, and the potential for new trade and healthcare policies from the current administration. Tailwinds include the recent FDA announcement about phasing out animal testing, a general willingness to expand the use of modeling in pharmaceutical development, and the increasing spending on artificial intelligence solutions among our customers. In the long run, we expect most of the headwinds to resolve while the tailwinds are likely to remain in Sertara's favor. With that in mind, we will continue to execute our strategic investment plan, focusing on the integration of AI into our software solutions, building a more integrated software platform, increasing our investment in bio-simulation model development, and expanding our solutions into the earlier stages of drug development. Sertara's value proposition is multifaceted. We accelerate decision-making to drive more cost-effective development by making better use of scientific modeling and data analysis. Over the past several years, we've invested to build Sertara into the leading partner in bio-simulation by creating new software products and features, building a robust commercial infrastructure capable of selling to the large number of customers in our industry, and executing strategic M&A to expand our capabilities. The FDA's recent announcement of a plan to phase out animal testing requirements from monoclonal antibodies and other drugs increases the relevance of Sertara's capabilities. This new direction follows a framework outlined by Congress in the FDA Modernization Act 2.0 that was passed in late 2022 and aims to develop a clear regulatory pathway to streamline the drug development process, including leveraging computer modeling and artificial intelligence to predict a drug's behavior. Sertara has created a bio-simulation solution called Non-Animal Navigator for preclinical monoclonal antibody development, which uses our SimSip simulator and our QSP modeling group. The solution also leverages the extensive experiences of our services team in creating -in-human study designs. In the weeks following the announcement, we have seen significant inbound interest from customers who would like to understand the role Sertara can play in their preclinical development. Just last week, we hosted an online webinar with over 400 attendees, outlining our approach to helping customers navigate alternative animal testing. We believe new regulatory initiatives at the FDA, including phasing out animal testing, are long-term tailwinds for the adoption of modeling and simulation tools across drug development phases. Now turning to our commercial performance in the quarter, in software, we continue to see healthy bookings performance from our tier one and tier three customers, with high renewal rates and a modest upsell contributing to growth. We've also begun to realize some cross-selling benefits as we integrate ChemAxon into our broader commercial organization, leading to another strong quarter with $5.9 million of revenue. In services, we observed stable demand across both biosimulation services and regulatory services. In biosimulation services, we continue to see some softness in the tier one customer base, which was offset by solid growth across tiers two and three. In regulatory services, we saw revenue of bookings growth on a -over-year basis with strong contribution across all three customer tiers. Heading into the second quarter, we are encouraged by the underlying demand from customers and are confident in our ability to meet our commercial goals at this point in the year. In addition to strong commercial performance, our R&D teams continue to make progress in the software development front. On April 1st, we announced the 24th version of our SimSib simulator, which was the culmination of months of hard work from our team paired with valuable feedback and insights from over 30 consortium members. This year, updates were focused on numerous new features, including an expanded library for drug-drug interactions, additions to our biopharmaceutical and virtual bioequivalence modules, enhancements to support modeling of special populations, and an improved user interface. To date, SimSib has supported over 120 FDA-approved novel drug applications and over 300 label claims in addition to being granted numerous clinical trial waivers. As we expand the breadth and capability of our software platform, we look to stay active and in front of our customers. We are excited to host the second annual Certainty Conference in Philadelphia beginning tomorrow. Last year's conference was a success, and we were thrilled to host over 300 clients showcasing the advancements we've made in model-informed drug development. Certainty has become an opportune time to showcase our capabilities in the preclinical area as our customers look for alternatives to animal testing, and there will be several presentations elaborating on how Certara can help drug developers implement new approach methodologies, such as PVPK and QSP. During the quarter, we also had the pleasure of welcoming new leadership to our services group. We're pleased to welcome Dr. Adrian McKemme as president of our drug development solutions business. Adrian joined Certara with over 25 years of industry experience, having led business transformation, portfolio management, and R&D initiatives for a wide variety of clients in the biopharma industry. As part of a planned leadership transition, Patrick Smith has moved into a new role as senior vice president of translational sciences. Patrick will continue to be a key member of our services group, focusing on Certara's scientific growth and innovation. Before wrapping up, I wanted to provide an update on some recent announcements. On April 14th, we announced a $100 million share repurchase authorization and provided an update on the strategic review of our regulatory business. The board's decision to authorize a shared repurchase allows us to have more flexibility with the management of our capital to drive value for shareholders. This authorization from the board reflects their support and confidence in our investment in biosimulation, including AI, and in the strategic decisions we have made to drive long-term growth for the company. However, our primary use of capital remains the same as it has been since we became public, and we will continue to be active in looking at M&A opportunities and making organic strategic investments to drive long-term, sustainable growth. Also, as we announced, we have been proceeding with our review of the regulatory business and have received interest from external parties that we do not have more to announce at this time.

To close, we

are pleased with our first quarter results and we are excited by the evolving opportunities at the company. Our team is executing against our commercial plan, driving solid operational performance in light of more muted end markets. Our R&D initiatives are progressing nicely and we are on track to launch several new products later this year. The secular tailwinds for biosimulation continue to drive adoption, and we are excited to play a role in the evolution of drug development towards new methods and approaches. With that, I'd like now to hand things over to John Gallagher to discuss our financial results in more detail.

Thank you, William. Hello, everyone. Total revenue for the three months ended March 31st, 2025 was $106 million, representing -over-year growth of 10% on a reported basis and on a constant currency basis. Total bookings for the first quarter were $118.2 million, which increased 12% from the prior year period on a reported basis. Trailing 12-month bookings were $457.7 million, increasing 16% on a reported basis. Excluding Comaxon, total company organic bookings growth was 7% compared with the first quarter of last year. Software revenue was $46.4 million in the first quarter, which increased 18% over the prior year period on a reported basis and 19% on a constant currency basis. Organic growth in the quarter was driven by biosimulation software and Pinnacle 21. Additionally, Comaxon contributed $5.9 million to our reported revenue, which came in ahead of our expectations. Rattable and subscription revenue accounted for 57% of first quarter software revenues, or 62% when excluding Comaxon, up from 61% in the prior year period. Software bookings were $40.8 million in the first quarter, which increased 23% from the prior year period. First quarter bookings include $4.9 million of Comaxon bookings. Trailing 12-month software bookings were $177.3 million, up 27% year over year. The software net retention ratio was 102% in the quarter. With organic software revenue growth at 4% in Q1, consistent with our plan, this NRR is below the historic average based on expected timing of software revenue achievement during 2025. Looking at our software bookings performance by tier, we saw very strong performance in both tier one and tier three customers in the first quarter, driven by continued adoption of our software. Now, turning to services revenue, which was $59.6 million in the first quarter, up 4% versus the prior year period on a reported basis and on a constant currency basis. We saw strong performance from our regulatory services business in the quarter, delivering a second consecutive quarter of year on year growth. Technology-driven services bookings in the first quarter were $77.4 million, which increased 7% from the prior year period. TTM services bookings were $280.4 million, up 10% as compared to the prior year. In the quarter, we saw stable demand for our biosimulation services, with softness in tier one offset by strong bookings growth in tiers two and three. Regulatory writing bookings grew double digits versus the first quarter of 2024. Total cost of revenue for the first quarter of 2025 was $41.5 million, an increase from $39.3 million in the first quarter of 2024, primarily due to higher software amortization expense. Total operating expenses for the first quarter of 2025 were $56.9 million, a slight decrease from $58.7 million in the first quarter of 2024, primarily due to a $3.1 million decrease in the change in fair value of a contingent consideration, which was offset by higher sales and marketing expense and intangible asset amortization. Adjusted EBITDA for the first quarter of 2025 was $34.8 million, an increase from $29.1 million in the first quarter of 2024. Adjusted EBITDA margin in the quarter was 33%, which came in ahead of our expectations. As I discussed last quarter, we plan to continue investing in R&D in 2025 to drive new product development and further integrate our software. In the first quarter, we saw some benefit to EBITDA from slower than expected hiring, which contributed about 200 basis points to our EBITDA margin. We expect hiring to pick up through the middle of the year, which will align margins more closely with our guidance expectations over the next several quarters. Wrapping up the income statement, net income for the first quarter of 2025 was $4.7 million, compared to a net loss of $4.7 million in the first quarter of 2024. Reported adjusted net income for the first quarter of 2025 was $22.4 million, compared to $16.5 million for the first quarter of 2024. Deluded earnings per share for the first quarter of 2025 was 3 cents, compared to a loss of 3 cents per share in the first quarter of 2024. Adjusted diluted earnings per share for the first quarter of 2025 was 14 cents, compared to 10 cents for the first quarter of last year. Moving to the balance sheet, we finished the quarter with $179.1 million in cash and cash equivalents. As of March 31st, 2025, we had $294.8 million of outstanding borrowings on our term loan and full availability on tax. We also had $2.5 million in cash under our revolving credit facility. As William mentioned earlier, the board authorized a $100 million repurchase program in mid-April. Following the announcement, we have repurchased approximately $25 million of that authorization to date. We are reiterating our guidance today as follows. We expect total revenue in the range of $415 to $425 million, representing growth of 8 to 10% compared with 2024. We expect Chemaxon to contribute software revenue of $23 to $25 million. We expect adjusted EBITDA margins between 30 to 32%. Similar to our guidance last year, we anticipate a higher EBITDA margin at the lower end of the revenue guidance and a lower EBITDA margin at the higher end of our revenue guidance. This will be driven by discretionary investments in research and development, which will be managed based on our commercial performance as we progress through the year. We expect adjusted EPS in the range of $0.42 to $0.46 per share, fully diluted shares in the range of $162 to $164 million, and a tax rate in the range of 25 to 30%. I will now turn the call back over to our CEO, William Ferry, for closing remarks.

Thank you, John. To summarize our message today, we are pleased with many exciting developments at Tatar in the first quarter, and remain focused on executing our growth and profitability goals in 2025. We are working hard to capitalize on our commercial opportunities, including the recently announced phased out of animal testing for monoclonal antibodies, and we have begun to repurchase shares under the new share purchase authorization. I am proud of the work of our team, and I look forward to providing additional color as the year progresses. Operator, can you please open the line for questions?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Michael Cherney of Lerink Partners. Your line is open.

Great, thank you. This is Dan Clark on for Mike. First one from us, just on the inbound interest you've received for your non-animal navigator thus far, are there any common themes for companies or tiers of customers that are particularly interested? And then as a second question, what do you kind of think the right NRR is for Sirtara in this business environment? Thank you.

Yeah, thanks. I'll take the first one. We've had

a tremendous amount of interest of customers coming to our webinar or calling about it. I think a

lot of the market is trying to understand what the FDA wants and

what the possibilities are and how fast this

is gonna happen. I

think in general, companies have been interested and excited about potential change in the way drugs are developed and using fewer animals and trying to figure out how far is the FDA following in their thinking and when would they make a switch in drug development? So those are the kind of questions we're getting right now. And also I'd say also just sort of how far along is the technology and what can be replaced with animals? Which animal usage can be replaced today? And then for the second question, I'll turn it over to John.

Yeah, thanks Bill. So on the NRR, this quarter at 102% is lower than what you've typically seen for us. And that's driven by a couple of things. One is the organic software growth at 4% is lower than our implied guidance range at 6 to 8%. But it was on our expectations. So there was some expected timing related to the achievement of organic software revenues that we would expect to play out an increase over the remaining course of 2025. In addition to that, the portion of ratable software is increasing. In fact, in Q4, excluding Kimaxon, we had 70% ratable. That tends to be our high point in a Q4. Here in Q1, we had 62% ratable, which was growth year on year. And so the more ratable that we achieved, the more that the software growth is gonna roll out during the quarters of 2025. So I think in relation to what you should expect, I think it's important to look at a measure like NRR over a multi-quarter basis. So last year we had an average of about 110. This year, what we're saying is the 102 came in on plan and we'd expect it to increase

as software revenue increases.

And that's all I can really say. Our next question comes from Joe Frewink of Bear, you're lying is open.

Great, thank you for taking my questions. Similar, I want to follow up on those reaching out to you. What is the scope? You know Finley you just talked about kind of the questions being asked, but what is the scope of commercial engagement look like? Are customers wanting to get more scientists under a license agreement? Is there talk about equipping users with stuff they don't use right now? I think one of the things that's maybe coming up a bit more often is that QSP modeling could really inflect higher. I guess what's kind of the initial feel on commercially how your business might evolve?

Yeah, thanks, Joe. Well, so the questions around, everybody's questions around what

can be replaced today and then what's more aspirational. So I think that it would be very difficult to replace all animal models today given what's used, but a good deal of the usage could be replaced. So we've launched a product called Non-Animal Navigator, which combines both our QSP capabilities and our drug development capabilities with the idea that we can use QSP models to inform dosing on things like monoclonal antibodies and eliminate a lot of the preclinical use of animal models. In the longer run, well, as I said, the other piece of this is around toxicology. We have QSP and some of our toxicology models can inform the decisions that need to be made there in preclinical. As you get into longer run studies, those could be hard to eliminate right away, but those are not really the focus of everybody right now. So hopefully I can answer that question. I think there's a little bit of color there.

Yeah, that's great. And then obviously the question that's coming up is, how big of a dollar opportunity could this ultimately be for the biosimulation space? It might just be too soon to say, but maybe I'll ask. I think about how Sotara has traditionally framed the growth in their business and kind of the parameters of 10 to 15% over time. Would you kind of view the recent roadmap as increasing the confidence on sustaining 10 to 15% or do you really think this could be a shift up entirely and so it results in a number above the 10 to 15% range?

Yeah, I think it's probably a little bit too early to make that call. The FDA made an announcement that is very encouraging and I think very complimentary in terms of the value that Sotara can bring to something like this, but it's gonna take some time to implement it and we'll have to see how fast that goes. I think that's the key variable there. As I said, we're already getting, we got a lot of early interest, but we're talking about a significant change in a regulatory process, in a drug development process that can take years. So those will have to roll out as we go forward. I would say overall, it will be helpful to our growth rate, but I think it's probably too early to kind of give you a number right now.

Okay, all right, great, I'll leave it there. Thank you.

Thank you. Our next question comes from Scott Schoenhuis of KeyBank, your line is open.

Hey, team, thanks for taking my question. My first question relates to the potential pharma tariffs. Are you having conversations with your customers on this? Is it, are they saying it's going to be impacting or they're being more cautious with their budgets going forward? Any color around this potential Edwind or Tailwind in your view? And then secondly, as a follow-up to the FDA phase out of animal models, is it more centered around smaller biotechs that are coming to you around monoclonal antibody preclinical studies or is it larger in terms of your larger, more, sorry, broader in terms of your larger customer base?

Thanks. So let me take the second, we'll stick on the animal models first, I'll take the second question first. So we had a webinar last week, we had, I think, over 800 people responded and the mixture was, as we tracked it, was everything from biotechs to large pharma companies to even people in government agencies as well. So the interest has been quite broad in using the technology

to eliminate animal models. On

the tariffs, yeah. For tier one customer tariffs, then we had already seen slowness in decision-making as it relates to like Q1 performance and you'd see that show up in our tier one biosyn services. But I wouldn't say that we'd call out anything specific, any specific difference in customer behavior than what we'd seen to date, at least not yet.

Yeah, so Sertar is isolated directly from the tariffs, so nothing we sell would be subject to a tariff. We're selling generally into an R&D market, so tariffs don't directly affect that. So, you know, not saying there won't be an effect across the broader markets, but it'll be something some indirect, you know, if it happens, then our customers haven't really been talking about that with us.

Okay, that's helpful. Yeah, it's more of the derivative impact on R&D budgets and what it could mean. So that's really helpful. I appreciate all the color there. Thanks, guys.

Thank you.

Thank you. And our next question comes from David Winley of Jeffreese. Your line is open.

Hi, thanks for taking my questions. Good afternoon. Bill, you talked a fair amount in the past about, you know, kind of the inertia in pharma drug development and in the way they do things. It sounds like the FDA announcement, both, I guess, the initial Fodama II approval and then this more recent announcement, our nice shot in the arm to try to break some of that inertia. My understanding is that maybe the FDA is reaching out to a, I'm not sure how long the list, but a pilot list of drug developers to try to engage around this new thinking. So I have several questions. One, I guess, is thinking about what do you think is the key to kind of move pharma off its perch and get confident and comfortable in the regulator's willingness to truly accept this stuff? Does it take an approval of a drug that has gone through a, you know, a no animal or an animal-like drug development cycle to, in terms of kind of the evolution or the replacement of an IND-enabling package, like what do you think that looks like in the future and where does Tertara's software, like what parts of that package can you insert yourself into and replace what is currently answered through animal data? Thanks.

Okay. All right, so several parts to that question. So the first one I heard was, what's the key to move pharma off its current perch? And I think that there are two things. One is, you know, the FDA is continuing to, you know, expound upon their original announcement. And they've been, you know, they've talked about how they would both encourage the use of alternative technologies and potentially discourage people who didn't move. So I think the industry is looking for some more information about how that will play out. I think that, you know, practically speaking, it does take an approval, but the FDA specifically called out monoclonal antibodies and other drugs. I think monoclonal antibodies are one area in which the use of animal models has been highly questioned and the technology is fairly advanced in using alternatives. So that's a good thing. There are drugs that have gone to the FDA that effectively have not used animals, not monoclonal antibodies, but, you know, things like, you know, often, you know, if you take a gene therapy into an IND right now, it really doesn't make a lot of sense to use an animal model on a technology like that. And so there are examples where the FDA has effectively used modeling in lieu of animals because it just didn't make any sense to use animals. So I think that's some early signs of which way things may go as this expands. In terms of the evolution, you know, of the IND package, you know, my thinking on this is that, broadly speaking, animal models are used in, really in three ways as the IND goes through. So one is in the basic, you know, first, you know, first in human dosing. In that case, the models today are better than, in many cases, than what you can do with animals anyway. So, or at least they are in monoclonal antibodies. So I think that we're pretty well positioned to make a good argument to our customers that we've got technology there that continue to use some animals if the FDA is going to discourage that, is more than feasible and you can go faster and, you know, everybody, you know, it will be more efficient and lower cost. Second piece is on toxicology. So looking at things like liver tox, cardio tox, things like that. For those, the models exist. Probably they can be improved over time now that people, you know, have gotten a lot more interested in this area. They can be tied into, you know, if you look at the FDA's announcement, they talk about organ on a chip technology, so we can tie into the companies that are working on that. And so what I'd say on that is we have, you know, we have pretty good modeling capabilities in those areas, but, you know, tox is a big area and we could probably make bigger investments and expand on that since this will be a new area. And I'd say the third part, which is probably the longest part out, is kind of the long-term studies, things like, you know, you're looking for, you know, long-term cancer or something like that. Those are the hardest to replace all the animals, just because, you know, by almost by definition, you're looking for something that nobody has modeled. But they're also not the largest use of the animal. So, you know, I'm guessing, I don't know how the FDA is going to think about that, but my guess is they're going to probably put that part of it off as new technologies become available. So we know they're looking for modeling, they're looking on, they specifically mentioned things like organ on a chip. And, you know, they're looking for new modeling, new technologies that can replace this, and they're generally favoring, you know, making a change in that way. So long answer, David, but hopefully I got a lot of your parts to your question there.

Great. I really appreciate it. I'll yield. Thank you. That was helpful.

Thank you. And our next question comes from Dan Lenwood of UBS. Your line is open.

Thank you. First, a cleanup question on the services business. It sounds like regulatory is now a good guy in comparison to biosimulation services, and I'm wondering why that would be.

Well, a couple of things there. Most

importantly, you know, we've fully built out our commercial team. The commercial team is executing very well across the board, including in regulatory, so we've been very pleased with the performance there. And then when you look at last year, then, you know, it's important to keep in mind that we were hitting some low spots last year, and so the compares that we have are easier as well.

Thank you for that. And then just to follow up again on this FDA bit, is it possible at all to compare and contrast, you know, your inbound activity and interest following the passage of the FDA Modernization Act 2.0 a few years ago with what you're experiencing today following the most recent updated FDA discussion?

Yeah, what I would say is the FDA Modernization Act was passed by Congress, but the industry didn't do very much because the FDA didn't say very much. So the difference now is that the FDA has sent a very clear signal about what they are really intending to do, and they're sending it to the market and, you know, I guess to their examiners, which isn't really the situation we had a couple of years ago. So I would say a couple of years ago, I would have characterized as Congress said the FDA could do something, but, you know, they didn't move at

that time to do it. Got it. Thank you.

Thank you. And our next question comes from Jeff Garrow of Stevens. Your line is open.

Yeah, good afternoon. Thanks for taking the question. Maybe one more on the non-animal navigator product. You know, I recognize it's very early, and you have a big event this week, and that will be a key topic there, but wanted to ask further about how the pipeline has been building for that offering, and if you could put a timeline on potential financial impact, such as a first contract booking related to that product. Thanks.

Yeah, hi, Jeff. So I'll take the last part first, and Bill can fill in if there's something I missed there, but as far as, you know, when and how much, it's, you know, it's early for us to tell. You know, the key areas of products that we're focused on are obviously our QSP offerings and the SimSip offerings, and we're getting a lot of inbound interest, as Bill had said earlier, but it's really too early to tell, and it feels, you know, it feels like something that we'd look beyond Q2, but stay tuned. We need to see it, you

know, in the performance, and then we'll be able to give you an update.

Well,

makes sense,

and then the prepared remarks, you mentioned client AI spend as a tailwind, so I was hoping you could elaborate on your continued effort to infuse your products with AI and whether your investments there are being recognized as a differentiator in the market. Thanks.

Yeah, thanks for the question. So we've, last year we

launched a couple of AI products. One of the major ones was our co-author product, which is used in basically writing regulatory reports, but we'll eventually write other reports as well across our software portfolio, and we have some other products we put out last year, and there's a couple coming out this year. The ones we launched last year have meaningful revenue, so we're pleased at the growth rate there. They also, as I kind of referenced in my talk, attract a lot of attention from our customers, so everybody's trying to figure out what AI means, and they're really good for getting in to have conversations with customers who want to see the latest and the greatest. So, and then generally we can often move on to, you know, a more comprehensive discussion around our whole portfolio as well. So I think, you know, it's all good for Sotara. I think, you know, you always have to remember that a couple of years ago, you know, none of us really were thinking, I mean, nobody was really thinking about GPT-based AI, you know, and then the world kind of woke up very quickly, and so there's just a tremendous amount of experimentation and, you know, fairly large budgets being devoted to that. As that kind of experimentation phase shapes out, there's going to be a set of companies and products that, you know, could generate money, and that's really what we're focused on doing. So we're not trying to be, you know, a general AI company, but we are intending to really, you know, enhance the growth of biosimulation by bringing AI to the technology we already have, and we think if we do that, then there's plenty of value to be generated for

our customers, and that'll be good for Sotara as well. Understood. Thanks for taking the questions.

Thank

you.

And our next question comes from Max Mock of William Blair. Your line is open.

Great. Thank you. It's Christine Rains on for Max Mock. So, two for us. The first one, again, related to the preclinical animal testing space. Just hoping you can comment on what percentage of your current, both small and large pharma customers, utilize your software and services to help you for preclinical applications today. Just trying to get an idea of where penetration is versus your clinical offerings and what you think is a reasonable trajectory over the coming few years.

So we hadn't broken out the proportion of revenue by preclinical versus clinical, but we have said that, you know, historically, the majority of our revenue was coming in the clinical phases. So, you know, obviously, with Chemaxon, we're expanding our footprint into discovery, and a portion of the legacy Sotara business wasn't preclinical.

All of this would expand that.

Great. Thanks. And then relatedly, can you talk about any additional planned investments that you're making or planning to make in building out your preclinical offerings and in what areas? And relatedly, how should we think about your newly launched, the non-animal navigator solution? Is it more of a repackaging of your existing software and services that are mostly applicable to the preclinical space, or is there anything in the solution that you previously did not offer?

Well, we have been investing pretty aggressively in the development of our QSP group and technology and software. A lot of that is tied to preclinical and effectively, you know, directly falls into the category of what we're talking about in non-animal usage there. Non-animal navigator was intended to be a combination of that plus some of our drug development strategists who basically can explain to customers, you know, what is the new, and also our regulatory experts too, to explain to customers exactly what is the situation, you know, how do you come up with a plan for your preclinical development, leading it into IND under the new thinking with the FDA, and then how do you implement that using software like our QSP team? So, I don't know, you know, I would say that we moved quickly to put several of the key pieces that you need for this that were already available on Sertara together, and I think that will be a winning combination.

Yeah, one point I might add as well too is that the addition of applied biomass at the tail end of 2023 really gave Sertara, so the combination of our existing QSP practice plus applied biomass and having been together for more than a year now, positioned Sertara with, you know, a market-leading stance in QSP, which as Bill just said is going to be a key component to capitalizing on the

opportunity in front of us.

Great, that makes sense. Thanks for the call.

Thank you. And our next question comes from Constantine DeVitas of Citizens, Your Line is Open.

Thanks, just changing gears a little bit, just wondering if you can give us a little bit of an update now on Sertara Cloud, it's been a few quarters since you rolled that out, and just give us some sense for how that's scaling and what kind of engagement or behavior you're starting to see that spur.

Yeah, so we're pleased with the

take rate on cloud, in fact it's really just a component of pushing the software update across, so when Phoenix customers are renewing their licenses, they're accessing, their new logins are accessing Sertara Cloud, which is providing them a better experience and obviously access to the software they've already purchased, but all of the software that we offer. And so, the value proposition of Sertara Cloud is giving the opportunity to see the breadth of the product portfolio, and given the many, many customers we have for a product like Phoenix that's turning over on an annual renewal basis, then we have a pretty strong

presence in Sertara Cloud as we sit here now.

And I guess just a follow up there on the Phoenix, I know you're trying to move a little bit more of that base to a hosted solution, where does that kind of sit now and how should we think about how that's going to trend over the next few years?

We're still in the earlier innings of the conversion, and so the good news there as part of the R&D investment that we're making in the software portfolio during this year is putting in enhancements and added functionality to the Phoenix hosted product that will be attractive to our customers, and so we're expecting that the take rate on shifting

to hosted will increase, but it's still going to take some time.

Thank you. Thank you.

And our next question comes from Brendan Smith of TD Cowan. Your line is open. Hi, this

is Jacqueline on for Brendan. Thanks for the question. Given the reiterated guidance, where specifically do you see the opportunity for potential upside within the software business in fiscal year 25 as well as within services?

Yeah, I mean, so the upside opportunity are all the good things that we've been talking about here related to the shift away from animal testing. We just talked about some of the investments in the software product platforms that are going to drive additional adoption by customers, so there's a lot of optimism and excitement. I think we need to see, you know, one of the key questions here, of course, has been what's the timing that this will play out, and it's early, but we have a lot of inbound interest, and that's really what drives the upside, but the counterbalance to that, which is important, is that we continue to operate in an end market environment that's significantly challenged. So, you know, while we're optimistic, we're executing very well, which we saw evidence of in the bookings in Q1, but the counterbalance to that is the end market environment. Think of biotech funding, think of tier one pharma, slowness in decision making, all of which is a carryover from what we experienced in 2024 and was a component of our guidance as we moved into this year that we expected more of the same in the end markets from 2024 carrying over into 2025, and that's exactly what we've experienced so far.

That's great, and I'll just hop on the bandwagon here for just a quick follow-up on the FDA announcement. Do you have any thoughts on how the FDA will select platforms to include in their upcoming pilot studies?

Well, I think it's

too hard to talk for the FDA. I think that will be coming out. They're

obviously very interested in this, and they're talking with a lot of companies, so let's see what they do.

Excellent, thank

you. Thank you. And our next question comes from Vikram Piruhe. Hi,

guys, this is Parth on Vikram. Thanks for taking our question. Just on the FDA announcement, do you guys contemplate on adding additional types of software programs as time goes on to kind of help push out this non-animal navigator product?

Yeah, thanks for the question. It's

only a couple of weeks out, so we are, you know, we're thinking a lot about

that. There's an opportunity here for Sirtara. There's an opportunity to make certain types of investments, but we haven't announced anything yet, so we'll let you know when we're

ready. Thank you. This concludes our question and answer session and

today's conference call. Thank you for participating, and you may all disconnect.