Simulations Plus, Inc.

Greetings and welcome to the Simulations Plus Second Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Siegel from Hayden IR. Thank you, Mr. Siegel. You may now begin.

Good afternoon, everyone. Welcome to our second quarter fiscal 2022 financial results conference call. Hosting the call today are Simulation Plus' CEO, Sean O'Connor, and CFO, Will Frederick. An opportunity to ask questions will follow today's presentation. Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. Words like believe, expect, and anticipate mean that these are our best estimates as of this writing, but that there can be no assurances that expected or anticipated results or events will actually take place, so our actual future results could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, our ability to maintain our competitive advantages acceptance of new software and improved versions of our existing software by our customers, the general economics of the pharmaceutical industry, our ability to finance growth, our ability to continue to attract and retain highly qualified technical staff, our ability to identify and close acquisitions on terms favorable to the company, and a sustainable market. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the U.S. Securities and Exchange Commission. With that said, I would like to turn the call over to Sean O'Connor. Sean?

Thank you, Brian. Second quarter was another successful period for Simulations Plus. Revenue growth of 13% was in the upper half of our guidance range, and we continued to make strategic and operational progress across both segments of our business. We are well positioned to achieve our full year goals. The 13% revenue growth was purely organic, and surpassed the 11% organic growth rate in last year's second quarter. The primary growth driver remains our software business, which grew 25% year-over-year organically versus organic growth of 16% last year, excluding the contribution of Licksoft. This 9% improvement demonstrates how powerful the Licksoft acquisition has been for the company. Revenue from our service business declined 5%. In line with expectations, the total backlog of our service business increased 50%, suggesting that service revenue will return to growth in the second half of fiscal 2022. Strong operating leverage and the mixed shift towards software drove 40% deleted EPS growth to 21 cents and an adjusted EBITDA margin of 48%. Moving to our software highlights, GastroPlus revenue increased 22% compared to 16% in the second quarter last year. We signed three new commercial clients and had eight upsells in the quarter. China, a relatively new market for us, grew 34% off a small base, validating our decision to engage additional distribution to this growth market. I'd also note that GastroPlus was referenced in 18 peer-reviewed journals during this quarter. supporting our progress in making simulations and modeling mainstream in drug development. We also released Membrane Plus 3.0 to drive advances for in vitro, in vivo, extrapolation for permeability, skin penetration, and release assay systems. Once again, Monolix suite revenue continues to set the pace for our software segment. Revenue increased 43%, more than double the 20% growth rate last year, driven by strong renewals and upsells. We signed eight new commercial clients and had 11 upsells during the quarter. Additionally, our efforts to expand the addressable market geographically for Monolix Suite included distribution in China and Japan starting to pay off. Monolix Suite proves provides users with a fast, uncomplicated, and powerful suite of applications for pharmacometrics analysis. In January, we released an update that added a new module and a new model editor, among other enhancements. The overall result is improved performance for data, libraries, and algorithms. And we are confident in our ability to innovate and grow our technological advantages, leading to further share gains. Admet Predictor delivered 13% revenue growth in the quarter compared to 20% in the year-ago period. We added seven new commercial customers and had eight upsells in the quarter. We continue to advance our AIDD collaboration. Turning to our services highlights, PKPD services revenue declined 14% while the backlog increased 18% in the quarter. Year-to-date revenue declined 6%. The relatively high number of project disruptions that impacted the business during the second half of fiscal 2021 continues to normalize. We booked eight new projects from four new customers and from four continuing customers, demonstrating our strong demand and bolstering our confidence in a normalization of services revenue. Given the cadence in moving from bookings to revenue, we view bookings during the first part of the fiscal year as a key leading indicator of positive revenue growth in the second half of the fiscal year. With improved bookings and a higher backlog, we're optimistic about the prospects for our PKPD services business overall. QSP QSP revenue declined 12% for the quarter, while backlog increased 78%. Year-to-date revenue increased 4%. This service segment is returning to pre-COVID-19 with a good mix of both efficacy and toxicology business and collaborations. Last week, we announced that we secured a Phase II SBIR NIH grant to develop further and validate our biologics STEM platform. This platform is the quantitative systems toxicology software focused on complex macromolecule liver safety. The grant provides approximately $1.7 million for internal software development and wet lab work over two years through our partnership with the University of Pittsburgh Drug Discovery Institute. The institute will utilize a next generation organ-on-a-chip system that compares liver toxicity in liver cells collected from healthy donors versus those with liver disease. This allows for the screening for signals related to liver safety mechanisms and provides this data for biologic CIM simulations. In addition, we booked other important QSP projects during the quarter. Gout CIM will be a QSP model of uric acid and the propensity for therapeutic candidates to prevent crystal formation in joints, which leads to pain and inflammation. Complement SEM will be a QSP model of the complement pathway to support evaluation of therapeutic targets and candidate compounds for diseases impacted by the complement pathway, which includes many inflammatory and nervous system disorders. Our PBPK revenue was flat this quarter and backlog increased 113%. Year-to-date revenue increased 15%. We are seeing increasing demand for PBPK services as the use cases for PBPK expand and exceed industry capacity, leading to more outsourcing. In January, we announced two new funded collaborations. We are partnering with a large pharmaceutical company to modify the GastroPlus Advanced Compartmental Absorption and Transit Model, or ACAT, in support of ongoing research programs for the treatment of gastrointestinal diseases. The second is with a large animal health company to both validate current animal PBPK models and to add critical new species to the GastroPlus platform. As a reminder, funded collaborations is strategically important to us. First, it further solidifies our relationship with an existing customer. Second, it helps us reduce our R&D costs and ensure that our innovation is aligned with the customer's immediate needs. Finally, we own the IP that comes from these collaborations and can use it with other customers as well. This proven strategy is an important tool for ensuring CastroPlus retains its industry leadership. Overall, Our services backlog increased 50% during the quarter. Further evidence that the challenges and disruptions in the second half of last year are behind us. As a result, we expect this business to return to growth in the second half of this fiscal year. Our fiscal year to date performance gives us confidence in our guidance. Our software business continues to deliver accelerated growth rates that are driving strong profitability. In addition, Our services business is recovering and should contribute to consolidated growth in the second half of the fiscal year. Accordingly, we should exit fiscal 2022 at a pace that supports our longer-term expectations for 15% or better organic growth with any acquisitions incremental to this number. With respect to M&A, we continue to look for strategic opportunities to increase our total addressable market and accelerate our growth rates. Let me now turn the call over to our CFO, Will Frederick, to discuss the financial results.