Certara, Inc.

Good day and thank you for standing by. Welcome to the Certara Second 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 first speaker today, David Deckler, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Sartar, we have William Ferry, Chief Executive Officer, and John Gallagher, Chief Financial Officer. Earlier today, Sertara released financial results for the quarter ended June 30th, 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 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 or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the most recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. The conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 6, 2025. Sertara disclaims any obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will turn the call over to William.

Thank you, David, and good afternoon, everyone. Thank you for joining Sartara's second quarter earnings call. John and I will begin with prepared remarks, and then we will take your questions. Sartara's second quarter performance reflected continued strength across the organization as we achieved results that were consistent with our full-year outlook in both software and services. Second quarter revenue of $104.6 million, represented 12% year-over-year growth, while second quarter bookings of $112 million reflected 13% year-over-year growth. Relative to internal expectations, we are pleased with the state of our financial performance and sales funnel as we head into the second half of the year. Across the portfolio, we continue to see strength in high-growth areas such as QSP services and our SIMSIP software. We have a high degree of visibility into second half software performance based on the mix of renewals in our pipeline, which gives us additional confidence in our full year growth expectations. In services, our commercial team continues to execute inline or ahead of our expectations, delivering 15% bookings growth in 2Q and 10% bookings growth on a trailing 12-month basis, which supports the revenue outlook through the rest of the year. As a result of our strong year-to-date execution, we are reiterating our full year guidance. Across a variety of customer groups, our conversations continue to reflect a mixed spending environment in our various end markets. Large pharma companies remain cautious, driven by a rapidly changing geopolitical and macroeconomic environment. Decision-making timelines for our customers have been affected by proposed pharmaceutical tariffs, and the potential introduction of a most favored nation pricing algorithm. Among smaller customers, the biotech funding environment has slightly improved, but it remains below trend on a historical basis. Despite these headwinds, we have been encouraged by persistent interest from customers seeking to expand their use of biosimulation technology, incorporating additional Sitara products and services into their development workflows. Throughout the second quarter, our team did an excellent job of remaining in front of key stakeholders and facilitating discussions about how we can further expand existing relationships. Now turning to our second quarter commercial performance. In software, we saw strong bookings performance across tiers two and three, offset by timing-related softness in tier one, which remains in line with plan on a year-to-date basis. Software revenue of $46.7 million grew 22% on a reported basis of 9% organically, led by strong growth from SIMSIP, in addition to $5.1 million of contribution from ChemAxon. In services, we saw bookings growth across all three of our customer tiers, led by strength in Tier 1 across both biosimulation and regulatory services. Strength in biosimulation services bookings was driven by QSP and SIMSIP services, while total regulatory bookings also grew nicely during the quarter. Services revenue of $57.9 million grew 5% on a reported basis. Sitara's SIMSIP reached a significant regulatory milestone earlier this week. We're happy to share that Sitara is the first and only company to receive European Medicines Agency, EMA, qualification for a PVPK modeling platform and CIMSIP is the only software to hold this designation. The recognition follows a rigorous multi-year collaborative engagement between Sertara scientists, technologists, and the EMA. The qualification is a significant milestone for biosimulation, demonstrating the value that regulators place on evidence generated through modeling and simulation approaches, and it will continue to encourage the usage of CIMSIP by companies globally. Sotara is continuing to increase investment in R&D to create our next generation AI-enabled MIDD platform. This investment started in 2022 before the breakthroughs in GPT-AIs were announced when Sotara acquired Viasa. Viasa brought to Sotara the foundational distributed data fabric technology, which has become the underpinning of our ability to integrate AI with our modeling technology and data sets. Since then, we have utilized this technology in a number of new AI features in our products and also some new important AI products like co-author. Last week, I was pleased to announce the promotion of Dr. Christopher Bhutan, founder of Vyasa, as Sertara's CTO. Chris is leading the integration of Sertara's key MIDD modeling tools into our next generation AI MIDD platform, which we'll be launching over the next year. We believe that Sertara can solidify our leading position in MIDD with this platform, which will fuse both AI and biosimulation technology to enable our customers to reduce the risk and cost of drug development. The next step in the creation of this platform will be the release this fall of Sertara IQ, an AI-enabled QSP software solution that includes an intuitive model-building interface and several pre-validated QSP models. As you will recall, QSP is one of the fastest-growing markets within model-informed drug development, and we have the largest group globally serving these customers. Our services team will adopt Sertara IQ as their preferred platform for executing QSP products, leveraging cutting-edge features and modeling capabilities. With Certara IQ, customers will have one unified QSP platform to reference in collaboration with peers, Certara, and regulators. The product will be based in the cloud, allowing for high performance simulation and analysis work at faster speeds. We believe this product launch is a critical step in growing the market for QSP solutions by democratizing access to modeling capabilities across our customers which should ultimately lead to more QSP use in clinical development. The product is currently in an early access phase with several customers, and we expect to announce a full commercial launch at some point in the fourth quarter. While we are on the subject of QSP, we received an update on our QSP collaboration with IGI, which was published in Nature Cancer last fall. Our QSP team worked with IGI to optimize the first in human dose of ISB2001, resulting in a clinical starting dose that was 50 to 100 fold over the conventional starting dose, and that reduced the need for animal testing. These predictions were validated by first in human trial results that were presented at AACR this year. And ISB 2001 was granted a fast track designation for the treatment of relapsed refractory myeloma patients in May. We are thrilled by the work of our QSP team and the outcome of these studies for all key stakeholders, showcasing the impact that QSP can have in accelerating trial timelines and accelerating the delivery of treatments to patients in need. In addition, Excitement about new approach methodologies, and particularly model-informed drug development, has grown in the wake of the FDA's guidance to phase out animal testing for monoclonal antibodies. While it's still too early to provide a precise estimate of the broader opportunity, we do view it as a multibillion-dollar addressable market over the next 10 years. We're excited to share that our QSP and broader SimCit businesses have begun to recognize bookings and revenue associated with the replacement of animal testing. Roughly 50% of our new QSP projects this year have been for monoclonal antibody therapies, which is a testament to CITAR's competitive positioning as the leader in QSP and services, as well as the growing momentum of NAM use in clinical development processes. Our acquisition of applied biomass in late 2003 and the subsequent combination of our two QSP teams has proven timely, and it's becoming an increasingly important component of our overall growth. Now shifting towards some other product-related updates. During the quarter, we released version 8.6 of our Phoenix PK PD platform, following months of development and incorporating feedback from key stakeholders. New enhancements included in the update for improved speed and efficiency of NCA setup, data preparation, and the speed of nonlinear mixed effect algorithms for population pharmacokinetics. As we have discussed in the past, this product has been made available through the Sitara Cloud, offering faster performance with lower backend IT costs for our customers. Initial feedback from our users has been positive, and we look forward to collaborating with them to drive further improvements to the Phoenix platform. Another key focus area for investment over the past several quarters was our Pinnacle 21 product suite, which is core to the data component of the software business. Following the acquisition of Formetics in late 2023, our team began to integrate Pinnacle 21 and Formetics data standardization capabilities, seeking to improve our customers' clinical data workflows and timelines. In early July, we were pleased to announce a new collaboration with Merck, expanding their use of Pinnacle 21 and broadly incorporating new integrated data standardization capabilities. This collaboration helped us build upon our longstanding relationship with Merck, which is an example of the type of engagement that Sitara is striving to build across our customer base. Our commercial team remains focused on identifying opportunities to form stronger partnerships with customers. both through the expansion of existing capabilities to more seats and expansion of new products and services. As we add to our portfolio organically and inorganically, our land and expand commercial strategy remains top of mind. Now, before handing things over to John, I wanted to provide an update on the strategic review of our regulatory business. Regulatory bookings have continued to grow nicely through the quarter, and we continue to value the business given the profitability and cash flows that it generates. Over the past several months, we have continued to make good progress in our review. However, this process has taken longer than we expected, which we attribute in part to the unprecedented nature of geopolitical and macroeconomic uncertainty that has taken place since the beginning of the year. With that said, we have maintained an active dialogue with several interested external parties, with discussions progressing beyond the initial phases of diligence. We hope to be able to provide a more substantive update before the end of 2025. To close, we are pleased with our second quarter performance and we are confident in our financial outlook for the remainder of the year. Our guidance is supported by solid bookings trends in services and high visibility in the second half renewal dynamics and software. Customer interest in model-informed drug development continues to grow stronger each quarter, supporting our growth strategy and validating the investments we are making in our business. We look forward to continued success and momentum during the second half of 2025. With that, I will 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 June 30, 2025, was $104.6 million, representing year-over-year growth of 12% on a reported basis and 10% on a constant currency basis. Total bookings in the second quarter were $112 million, which increased 13% from the prior year period on a reported basis. Trailing 12-month bookings were $470.8 million, increasing 15% on a reported basis, excluding Camaxon, Total company organic bookings growth was 8% compared with the second quarter last year. Software revenue was $46.7 million in the second quarter, which increased 22% over the prior year period on a reported basis and 20% on a constant currency basis. Organic growth was 9% in the quarter, driven by strong growth from SimSips. ChemAxon contributed $5.1 million to our recorded revenue, which was in line with our expectations. Rattable and subscription revenue accounted for 60% of second quarter software revenues, or 64% when excluding ChemAxon, slightly down from 65% in the prior year period. Software bookings were $46.6 million in the second quarter, which increased 11% from the prior year period. Second quarter bookings included $5.2 million of Camaxon bookings. Trailing 12-month software bookings were $181.9 million, up 25% year-over-year. The software net retention rate was 107.6 in the quarter, consistent with our full-year plan. Looking at our software bookings performance by tier, We saw strong performance in Tier 2 and 3, driven by continued adoption of our software. In Tier 1, we saw some timing-related slowness due to renewals, which we expect to normalize in the second half of the year. Now turning to services revenue, which was $57.9 million in the second quarter, up 5% versus the prior year period on a reported basis, and 4% on a constant currency basis. We saw a strong performance from our QSP and SIMSIP services businesses in the quarter, which was partially offset by softness and regulatory services. Technology-driven services bookings in the second quarter were $65.4 million, which increased 15% from prior year period. TTM services bookings were $288.9 million, up 10% as compared to the prior year. During the quarter, we saw an improved demand for our biosimulation services with bookings growth across all three of our customer tiers. We were also encouraged by regulatory writing bookings, which grew mid-single digits versus the second quarter of 2024. Total cost of revenue for the second quarter of 2025 was $40.7 million, an increase of $39.8 million in the second quarter of 2024. primarily due to higher software amortization expense offset by lower stock-based compensation. Total operating expenses for the second quarter of 2025 were $54.3 million, a decrease from $62.5 million in the second quarter of 2024, primarily due to an $8.5 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 second quarter of 2025 was $31.9 million, an increase from $26.3 million in the second quarter of 2024. Adjusted EBITDA margin in the quarter was 31%. As Bill mentioned earlier, we are executing on our investment plans this year and have begun hiring additional software developers in the second quarter, which will continue through the second half of the year. Total expenditure on R&D during 2Q, including capitalized spend, is growing year on year as a result of these investments. Wrapping up the income statement, net loss for the second quarter of 2025 was $2 million, compared to a net loss of $12.6 million in the second quarter of 2024. Reported adjusted net income for the second quarter of 2025 was $11.6 million compared to $11.4 million for the second quarter of 2024. Diluted loss per share for the second quarter of 2025 was one cent compared to a loss of eight cents per share in the second quarter of last year. Adjusted diluted earnings per share for the second quarter of 2025 was $0.07, same as the second quarter of last year. Moving to the balance sheet, we finished the quarter with $162.3 million in cash and cash equivalents. As of June 30, 2025, we had $297 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Earlier this year, our board authorized a $100 million share repurchase program. As of today, we have purchased a total of $25 million in stock, all of which was during the second quarter. 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 to 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 our revenue guidance and a lower EBITDA margin at the higher end of our revenue guidance. This will be driven by discretionary investments in R&D which will be managed carefully based on the timing of new product launches and business performance in the second half. We expect adjusted EPS in the range of 42 to 46 cents 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 the many exciting developments of Sitara in the second quarter, and we remain focused on executing our growth and profitability goals in 2025. We continue to make good progress on the software development front, and I am looking forward to sharing further updates following some new product launches in the fall. Operator, can you please open the line for questions?

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 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Joe Verwink of Baird. Your line is now open.

Great. Thanks for taking my question. Just a quick clarification. The multibillion-dollar addressable market opportunity you cited around NAMs, is that incremental to the low single-digit billion TAM you traditionally have discussed for biosimulation software?

Yes, we're looking at that as what would be additional opportunity, Joe, based on trying to what we think the long-term opportunity is for NAMs.

Okay, that's great. And then I thought it was interesting, Sutaria had a webinar during the quarter, and during the webinar they asked respondents just what they're currently using around NAMs, and I think 40% cited nothing, so that seems like a good opportunity, but 30% cited PVPK modeling 12% with QSP. I guess I would have expected the QSP responses to be a lot higher. What's kind of your interpretation of just how kind of the thinking is settling out? Does Sartara need to do more marketing on their part to educate customers around maybe the best course of action? Just how are you seeing kind of customer engagement decision-making change now that we're a few months further in?

So, Joe, as it relates to QFP, QFP is one of the bright spots on the quarter for us. So, I think that those results would would also surprise us as far as, you know, that's a pocket of the business along with SIMSIP, where we would see additional opportunity going forward. So, you know, QSP is a growing area in general, and, you know, our combination of our existing practice along with applied biomass makes us the market leader in that spot. So I would expect that ratio that you cited to grow into

Yeah, Joe, I think the other thing to be aware of, it's still pretty early days in terms of the markets thinking about what this announcement means and how it's going to play out as drug programs move forward. You know, the reality is QSP and PPPK are often quite closely linked. And so I think people may answer the question a little bit differently depending on sort of what they're more familiar with when they go in. QSP is a sort of a newer branch of model-informed drug development. And so, you know, the number that you cited doesn't really concern us. Obviously, we're pretty big in both of them. But, you know, I think it's, you know, the way I think about it is that it's up to 70% of people that are using technologies that, you know, that we're pretty good at.

Great. Thank you very much.

Thank you. Our next question comes from the line of Luke Sergott of Barclays. Your line is now open.

Hi, guys. This is Anna Krasinski on for Luke. Thank you for taking our questions. I was wondering if you could give any color on the demand drivers for software versus services bookings. we would think that the services booking strength is like a better leading indicator of future spend and adoption. So it would be great to get your sense of this.

Yeah, I think it's a good question. We don't, I think that might not be quite the right way to look at it. I think the demand drivers are software to some extent, you know, companies need the software as part of the R and D infrastructure. So that continues, but we have also, put quite a bit of R&D resources over the last periods into new products, which is driving some of that demand there. Services, it's come back nicely in the quarter, particularly compared with where we were last year. I think there are several things going on there. One of them has been particularly high demand for QSP services, which is kind of a new growing area, as I talked before. A second piece has been the linkage of the services to some of the software that I just talked about that people are buying. We talk about software and services as separate lines, but in fact they're often quite closely intertwined when we're actually making sales to customers, and so one drives the other.

All right. Thank you. That is super helpful. One quick follow-up. Can you share a little bit more on the dynamics that you saw across customer tiers? The biggest differences between Tier 1 behavior versus Tiers 2 and 3, particularly on the software side. Thank you.

Yeah, sure. So we did see Tier 1 software, as you saw in the chart, was impacted by timing of renewals. But, you know, as we look at the full year basis and in the second half, we have high confidence and good visibility into being able to achieve those renewals. So that was the one spot on the customer tiering. to call out. But then, you know, as you look at Tier 3, you know, despite the funding environment, then we've had strong performance on both software and services in Tier 3, so we've been pleased with that. And we had a particular, as Bill mentioned, we had a particularly strong quarter on services, both Biosim services on the Tier 1 side, that is, both Biosim services and in reg that was helping our overall growth rate there.

Awesome. Appreciate all the colors.

Thank you. Our next question comes from the line of Jeff Garrow of Stevens. Your line is now open.

Yeah, good afternoon. Thanks for taking the questions. I wanted to ask about the new AI MIDD platform. Curious if you can provide any more detail on how we should think of the glide path for customers as they might adopt that new platform in the future and more specifically does the um does the delivery model or economics between you guys and customers look any different and lastly there any concern over potentially pushing out demand ahead of an exciting new product launch

Okay. Yep. Thank you, Jeff. Appreciate the question. So, several questions there. Look, we're creating, you know, we believe that we have the industry-leading technology around biosimulation, and as I said in the call, we've made some very strategic acquisitions in the AI area. The opportunity there is to create a bigger platform that unites a number of our software solutions that work in different areas of drug development into one platform so that drugs can be optimized according to multi-parameters. Basically, our customers can make a better decision about which molecules to bring forward. We're really excited about this. We think that there's a very significant opportunity for the company and, frankly, for our customers to make much better decisions on which drugs to bring forward. That's an opportunity here. And the reason we highlighted it now is not so much to kind of pre-announce a product, but we are spending a fair amount of R&D to produce this. We've got a plan to launch this over the next year, as I said. I'm not particularly worried about your concern about customers kind of waiting it out. Most of our customers are pretty highly interested in using our existing products on their current drug development products. It's become, for a lot of people, really part of the standard way that you do some of the key technical parts in MIDD. So I don't think we'll see people pause that. This is going to be a new product. It's going to be over on top of what we sell today. It's got capabilities that are beyond what we have today. Like a lot of companies, the advent of the AI advances that have happened recently have kind of changed the game in terms of what's possible, and we're going to implement that in. So stay tuned. We haven't fully announced the product. The first part, however, is in fact being launched in Q4 and is in the hands of customers, but there will be more to that as we go forward over the next year.

Great. I appreciate that. Really helpful. And maybe to kind of translate some of the key themes there to the financial model, not just this new platform, but you've had co-author released kind of last year and growing this year. You have regular releases of your existing products and some other new ones as well. You just want to get your viewpoint on whether product launches alone are sufficient to drive organic growth out of the low single-digit to mid-single-digit range that the company has been in the last few years, or if you really do need a better macro environment on top of that. Thanks.

Yeah, thanks for the question. While we would love a better macroeconomic environment, we are not planning on that, and we're not dependent on that. we believe that the company is in a very unique and valuable spot where, you know, it's kind of a combination of maturity of technology and understanding by a lot of the industry and how to use this and acceptance by the regulators. All of them are coming together in a good way at the same time. And so, you know, this is a good time for us to to expand our product suite because the possibilities of what we can do are expanding, but we don't need any kind of recovery of the market in order to deliver the results that we're expecting. Now, at some point, markets go up and markets go down. At some point, markets will go up, and that'll be great, but that's not necessary for our model.

I appreciate that. Thanks again.

Thank you. Our next question comes from the line of Michael Cherney of Lear Inc. Your line is now open.

Great, thank you. This is Dan Clark on for Mike. Just had a question on the EMA qualification for SIMSIP. I know this just came out, but how are you thinking about that in terms of differentiating your product? Any early customer feedback on receiving that would be great to hear. Thank you.

Yeah, thanks for the question. I think that's been a real accomplishment by our teams. Our team's seen both of the EMA and Sertara. We've been working on this for better part two years right now to get this qualification. This is a significant, the way I would explain this is the EMA, like other regulatory agencies, has accepted the use of SIMSIP in drug applications for some time now. However, you know, the EMA really consists of 27 member nations, and there was no particular qualification of any product there. So for a lot of our customers, it would depend a little bit on, you know, what reviewer you got and what questions they asked. And, you know, that added time and some uncertainty to the overall process. So reviewers, you know, reasonably want to know what's in the models and they want to go qualify it. What this does is that it basically provides a pre-qualification. So the EMA is effectively saying that, you know, SIMSIP has been, all of the underpinnings of SIMSIP have been explained and examined and, you know, you don't need to do that. An approver does not need to do that again. in the middle of a drug application. So no one else has achieved this. It's certainly not easy to do the – I mean, it was a really expensive review, and, you know, it's not easy to get there. But for our customers, this adds two things. I think one is it's, you know, kind of a sign of – what the regulators think about the software, so they've looked hard at it and accepted it. And the second one is just from a practical standpoint, it ups the consistency of what you can expect when you go into a review process, because you don't have to worry about what questions you might get about the underpinnings of SIMSIP. That's already kind of taken care of before we've gotten there. It just makes it a whole lot easier to use the software in the review process and to expect consistent results.

Thank you.

Our next question comes from the line of Kyle Cruz of UBS. Your line is now open.

Hey, thank you for taking the questions. The software bookings declined organically, but it sounds like it's related to a timing issue with tier one customers where you have more visibility into 2H. Beyond 2H and given kind of a heightened visibility in future orders, could you provide early framing thoughts on 2026 relating to, you know, the headwinds with pharma tariffs, potential MFN and a potential reduction in pharma R&D spend? offset by the continued regulatory push for model-informed drug development, and if you expect growth to accelerate into 2026, and how much, and any early qualitative planning thoughts there. Thank you.

Hi, Kyle. Yeah, I think the right way to think about this is in terms of the investments that we're making in R&D and the product launches that Bill has been referring to, and the expectation that we don't rely on or expect the end-market environment to necessarily improve in the near term But we do intend to grow the business in the face of that. And so, you know, as we look at products that we've rolled out recently, we look at the strength of the existing platforms. I would call out SimSip as a key highlight in this quarter in that sense. And then you combine that with the product launches that we're heading toward inside of this year.

Then that sets up a nice platform for growth as we look at next year. Great. Thank you for that.

And then maybe could you discuss how you aim to get regulators comfortable with incorporating AI into model-informed drug development?

Yeah, we'll talk more about that as we launch this. But I think the – just saying AI in model-informed drug development doesn't cover all of the possibilities. So I think AI – As a regulator, I think you have to be questioning any kind of a black box where an AI is making a recommendation that you don't understand how they got there. We're well aware of that, and that's not what this does. What this type of technology does is it allows AI to process a lot of the scientific information we need to create models, and it allows us to build models much more quickly with our experts, but still in an explainable way. So in MIDD, the name of the game is really explainability. We have to explain what's in the model, where do we get it, what are the equations, where is the data that backs this up. And that's not gonna change. And so I think that regulators could feel comfortable about that. But the process of how you get there and the process of how you use some of the really top experts that we have in Sertara can get a lot better. Basically, we can bring down the cost of creating these models, we can bring down the time of creating them, and we can speed up the overall cycle that they're used on in the drug development process.

Great. Thank you so much. Very helpful.

Thank you. Our next question comes from the line of Brendan Smith of TD Cohen. Your line is now open.

Great. Thanks for taking the questions, guys, and thanks for all the color. I wanted to ask just another one actually about some of the new customer inbounds in the wake of FDA's pushing animal testing. I think you called out about 50% of new licenses in the quarter were kind of in that biologics biosim for non-animal testing arena. So I guess can you just maybe remind us how we should think about kind of the cadence over the next couple of quarters of really how and when some of the new bookings or even, I guess, new preliminary inquiries could translate into any upside? I mean, I totally understand there's always some variability in customer timing and all that, but just trying to understand some of your internal assumptions and around, you know, if a brand new customer comes to you specifically because of FDA, you know, what you expect kind of average time from first outreach to revenue recognition for you all looks like. Maybe what some of those considerations have been this quarter.

Yeah, well, probably the first thing to highlight, Brendan, would be, you know, the QSP business and the SIMSIP business we've said previously would be the areas that would be sort of the initial beneficiaries here. That being said, we do think it's a long-term conversion, as we discussed earlier in the call. But we have seen strength in QSP and SIMSIP, as we mentioned earlier, in the quarter. And as we look at the remainder of the year, there's certainly a potential upside in those two areas, which is both services and QSP services and SIMSIP software. So the customer conversations um have been good and i think that we're you know we're increasing the dialogue um while at the same time those businesses are you know outperforming our expectations on the year okay got it thanks guys thank you our next question comes from stephen deckert of key bank your line is now open

Hey guys, I just want to dig into the tier one slowing software renewals. Anything specific to point to there?

No. The way to think about it is that bookings are lumpy on a quarterly basis. We've certainly seen that historically. Revenue was strong, organic revenue at 9%. TTM organic bookings were at 11%, so that's indicative of what we've been booking, and we have good visibility into the second half renewals during the year.

That gives us a lot of confidence as we approach the remainder of 2025.

Okay, thanks. And then, given the strength you're seeing in QSP, what's the profitability of that product relative to your other offerings? Thanks.

Well, keep in mind, QSP, as it stands right now, is services. And it's the combination of our existing practice. along with Applied Biomath, which was an acquisition from 2023, which gave us a market leading position there. Profitability profile is what you'd expect of a services business. And as Bill mentioned earlier on the call then too, we're actively working to roll out some software associated with QSP in the form of Certara IQ later this year.

Okay, thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Our next question comes from the line of Max Smock of William Blair. Your line is now open.

Hey, good afternoon, guys. Thanks for taking our questions. Maybe just following up on an earlier question around QSP, and you flagged the 50% of new engagements tied to MADS as kind of a proxy for, the uptick in demand you think you've seen since the FDA guidance was released, but just wondering if you can give some more context around, you know, what the breakdown of therapeutic modality looked like for QSP pre-FDA guidance, and then any context you have around what portion of those engagements that you flagged in the quarter wouldn't have been won, in your opinion, without that FDA guidance?

Yeah, thanks, Max, for the question. So QSP has been working heavily on MAVS for some time. The FDA made an announcement, which I think is a result of the fact that there is, I'm guessing is a result of the fact that there is so much modeling going on in MAVS and you can get you can get some pretty good answers out of that. I'm not going to give you the specific numbers, but there's been somewhat of an uptick since the FDA made their announcement. I think, however, it wasn't like the FDA made an announcement and the next day all of a sudden everybody switched to using QSP. There's been a process since the announcement kind of started with one of the webinars that we, you know, very well attended webinars that we gave right after the FDA announcement, where companies have been exploring what's the possibility and what's the meaning of what the FDA is talking about. And during that process, a lot of them learned about the, you know, the benefits of QSP and we picked up from there. So it's been good for business so far. Is it, you know, Is it like at the maximum rate? No, it's going to take some time for the market to really build up and gain confidence about exactly how does the FDA want this to play forward. But it's definitely driven a lot of interest in that type of modeling. And, you know, it's driven revenues to the company. So I'll just leave it there.

Yeah, that's helpful. Understood. Thank you. Maybe turning to margins, you know, the midpoint of the guide implies about 30% in the second half. kind of well below you did 32 in the first half. And I know you talked about hiring, being a driver there, but you can just walk through any of the other kind of factors that are leading to that step down in 2H, in the second half of the year here, and then the cadence between the third quarter and fourth quarter. And then, John, I think more importantly, is Forky going to be a good jumping off point for thinking about margins next year, or are you going to moderate investments to make sure that you're protecting margins in 2026? Yeah.

Hi, Max. So, um, So first half was impacted by some slower hiring in Q1. So the best way to model for the remainder of the year is if Q2 is a good jumping off point. So our 30.5% margin in Q2 is a good way to think that as we continue to ramp the investments coming out of Q2 and into Q3 and Q4, then that's, you know, the Q2 margin is the good proxy and Q1 is less so. So I put this more in the quarter than the first half as the way to think about how to model the full year from a margin perspective because of those investments coming in. And then as far as the jumping off point for the margin next year, sort of aligned with what I was just saying, you know, the investments that we're making are, you know, that hiring is going to take place during, some of it was in 2Q. There'll be more of it in Q3 and into Q4.

So, I would say that Q4 would be a decent proxy for where we go ahead into the next year.

Got it. Thanks again for taking our questions.

Thank you. Our next question comes from the line of Gabrielle Weiner of Jefferies. Your line is now open.

Dave Windling here. Is it me? I think it's probably me, if you can hear me. Yeah. So, thanks for taking my question. I wanted to ask around kind of adoption curves. So, Surtar's been in this modeling business for, you know, a couple decades. probably seen several adoption curves and so my question is what are the telltale signs of clients that are on the cusp of you know say climbing the steeper looking adoption curve is it hiring more people in their quantitative sciences divisions is it running pilot programs what might that look like? And I'm asking as something to look for as relates to the NAMs and how we might try to observe pharma companies stepping into adoption of NAMs. Thanks.

Yeah, thank you, David. It's a complicated question because of the many different players in this market and, frankly, the lots of just the technical aspects of where biosimulation is used. But if I want to generalize, we often start with services. So a company, it's not exactly a pilot program, but the first one through often is a project that gets conducted by Sertara. And then as companies get excited and feel confident in what we're doing, they become software customers as we go forward. So if we look at that on NAMS, I guess to say NAMS is kind of an interesting thing because this whole announcement from the FDA has only been around a few months, which is really no time in the way pharma operates. Yet there has been a tremendous amount of interest We've been hired to do everything from additional QSP projects to, you know, strategy projects around what does this mean for my drug and how do I change the way I think about bringing it forward. And that's happened very, very quickly. So, you know, we're sort of trying to project off just a few months as to how this is going to play out over a multi-year process going forward here. But, you know, I think... In this case, what we see is, number one, companies are very interested in NAMs, right? A number of them kind of combine this with a test of additional modeling or biosimulation in their projects. So it's all good in terms of it's driving business to us, but it's it's a little bit convoluted about, you know, maybe they're, and oftentimes trying to do multiple things when they start working with us.

Yeah. Maybe as a follow-up to that is our, and trying to understand how the client might use or might try to arrive at the answers that they're trying to achieve without using animal models. And in so much as SIMSIP is an area that you're pointing to is, as being invoked by this. QSB is a little newer, but let's focus on SIMSIP. Is the client using SIMSIP in a different way to produce different answers than the clients have typically used SIMSIP to do? Or are they kind of running similar, maybe more intensive, but similar types of analyses

um modeling as they've done with simsip in the past but just are they trusting those answers more and moving on without you know say verifying in animals so the way i can explain it is this for some time many of our customers have been doing modeling in monoclonal antibodies in parallel to their animal testing and their the modeling has produced results that if the FDA allows it, and now they're fostering it, can be used to reduce, maybe not totally eliminate, the use of animals. So they've done that. Why are they doing that modeling in parallel? Well, really it's being done in parallel because it produces useful information that it's kind of difficult to get from animals. So for example, if you're trying to do first in human dosing, It's one thing to try that on a primate, but you can get a much better answer if you use modeling. And if you get a better answer, you're more likely to make better use of your phase one trials where you're trying to figure out the effective dosing range. So that's why they're doing that. That data, however, now everybody's looking at it and saying, wow, we can use some of this data and we can, if the FDA allows this, we can reduce the number of animals as we go forward. So that's good, but those are customers that are already working on it. They're taking some of the modeling they were doing for other reasons, and they're sort of like getting some additional benefit. And then other companies that were maybe on the fence about doing that are saying, well, you know, we ought to start taking a look at QSP as well. So that's why we say that this has been good for business so far. There's still some – I mean, I don't think anybody's actually gotten to the point of taking – a drug application to the FDA with reduced use of animals so far. Like I said, it's only been a few months. Hopefully, as that happens, then we'll see some kind of a snowballing effect as that drives even more interest.

Very helpful.

Thank you.

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