Simulations Plus, Inc.

Greetings and welcome to the Simulations Plus fourth quarter fiscal 2023 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 call is being recorded. It is now my pleasure to introduce Tamara Gonzalez from Financial Profiles. Thank you, Ms. Gonzalez. You may now begin.

Good afternoon, everyone. Welcome to the Simulations Plus fourth quarter and fiscal 2023 financial results conference call. With me today are Sean O'Connor, Chief Executive Officer, and Will Frederick, Chief Financial Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our investor relations website at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call. There can be no assurances that these will actually take place. So our actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. With that said, I'll turn the call over to Sean O'Connor. Sean?

Thank you, Tamara. Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and fiscal 2023 results. We delivered strong revenue and earnings results for fiscal 2023. And I'd especially like to acknowledge our team's impressive execution on building strong customer relationships. Our team's effort and dedication throughout the year while navigating a challenging environment helped to drive growth and demonstrated the strength of our customer-centric business model. Conditions in our market remain similar to what we have spoken to over the past several quarters. We continue to see a slowdown from small biotech customers who have been impacted by funding scarcity that has in turn affected renewal rates in this segment. Purchasing from large pharmaceuticals also remains delayed, driven by macroeconomic uncertainties and conservativeness. That said, these challenges were offset by our ability to upsell and to pass on price increases throughout the course of fiscal 2023, helping us to achieve our guidance targets for both revenue and adjusted diluted earnings per share for the fiscal year. The underlying fundamentals of our market are resilient. As such, we believe the slow pace of investing and modeling and simulation that we have seen over the past few quarters will eventually reverse given tremendous needs in drug development and the essential need for pharmaceutical companies to find faster, more efficacious ways to bring drugs to market. We anticipated these challenges last year when we provided our fiscal 2023 guidance for revenues to grow 10 to 15%, and we met that guidance, delivering 11% revenue growth for fiscal 2023. Based on early anecdotal customer feedback we have been receiving, we are cautiously optimistic as we enter fiscal 2024, as we have seen a slight uptick in biotech funding, and budget cycle optimism at some large pharmaceutical companies, but still not to the levels we've seen historically. Against this backdrop, our revenues and earnings were in line with our expectations. Fourth quarter revenues of $15.6 million were up 33% over this time last year, driven by a 59% increase in software revenues, with services up 8%. For the year, Total revenues were $59.6 million, up 11%, driven by software growth of 12% and services of 8%. Turning to profitability, gross margins and adjusted EBITDA remained solid. Fourth quarter gross margins were 78% and for the year were 80%, reflecting a favorable mix of higher margin software sales and our ability to pass along price increases. Adjusted EBITDA was 31% of revenue for the fourth quarter and 35% of revenue for the year. Net income in the fourth quarter was $534,000, or 3 cents per share. Adjusted net income for the quarter was $3.7 million, or 18 cents per share. For the fiscal year, net income was $10 million, or 49 cents per diluted share. and adjusted net income for the fiscal year was 13.8 million or 67 cents per diluted share. This is at the high end of our 63 to 67 cent fiscal 2023 guidance. I'm very proud of the results our team delivered for both the quarter and the year. Moving on to our software segments performance, software revenue increased 59% for the quarter and 12% year over year. Our renewal harmonization initiative to simplify and align contract renewals played out as expected and is essentially complete. And we do not anticipate future occurrences to have the same impact on quarterly revenue flow in fiscal 2024. We now have greater visibility into our revenues. And with contract harmonization now embedded in the normal course of our business process, we expect that both Simulations Plus and our customers will see the benefits going forward. There will, however, always be accounts that become candidates for harmonization during any year as we upsell additional licenses. Our software revenue renewal rate in the fourth quarter was negatively impacted by several non-renewals as a result of M&A activity in our client base and lower purchasing in pharma, biotech, and CRO markets. Additionally, a couple of QSP model licenses were not renewed due to drug program cancellations. Gaster Plus in our PVPK business had a strong quarter. Revenues increased 76% for the fourth quarter and 11% for the year. A strong growth in the quarter was largely due to the shift in contract renewals to the fourth quarter. Castro Plus was referenced in 22 peer-reviewed journal articles and added 10 new customers. The team also booked 11 commercial client upsells. AdMet Predictor, our AI-powered solution in cheminformatics business, saw revenues increase 46% in the quarter due to the shift in contract renewals. The team booked five upsells during the quarter and added six new customers. For the year, AdMet Predictor revenues grew 6%. Revenues for Monolix Suite, one of the most user-friendly tools in pharmacometrics modeling, increased 18% in the quarter thanks to five customer upsells and the addition of seven new customers in the quarter. For the year, Monolix suite revenues grew 15%. During the fourth quarter, our software team held a highly successful PK analytics summer school. This program educated over 450 scientists from 40 countries and served to increase community awareness of the benefits and features of this user-friendly validated tool for non-compartmental and compartmental analysis and bioequivalent evaluations. This event has supported growing attention and leads for Monolix Suite in the NCA scientific community. Looking at our services segment, revenues grew 8% both for the fourth quarter and for the year, representing 40% of total revenues, and completed 201 projects. Services is entering the new fiscal year with a healthy backlog of $20 million, 25% higher than this time last year. The backlog increase is primarily due to the investments we've made in sales and marketing, the addition of Immunetrics, and the exemplary efforts of this team. PKPD services revenue was down 1% in the fourth quarter and increased 10% for the year. During the quarter, PKPD saw excellent bookings that contributed to overall growth. During the fourth quarter, fixed price projects versus time and materials garnered the majority of billable hours and had some effect on revenue growth. With the exception of this quarter, the trend for higher time and materials as a percentage of projects would appear to likely continue into fiscal 2024. This is based upon the nature of the backlog as we enter the year. The revenue benefit of time and materials as compared to fixed-price projects is that these projects typically bring higher margins and have contributed to the growth of services margins to reach the mid-60s and above. QSP QST revenue grew 60% for the fourth quarter and 1% for the year, benefiting from our acquisition of Immunetrix in terms of revenue contributions. PBPK services revenue was down 1% in the quarter, but up 22% for the year. Although the fourth quarter was impacted by lower billable hours related to temporary staffing availability related to life events, the team saw excellent growth for the year. Our outlook for PBPK services growth remains strong and staffing hours are expected to return to normal as we start the new fiscal year. Services had a good year. We recruited top talent, hired 14 new scientists for the year, and saw strong retention amongst our talent pool. We also added 13 in the immun metrics acquisition. We also had some notable highlights in the quarter. Our QSP liver study safety tool was cited in a key public document this summer. The FDA cited dillysum results in their public medical review documents as part of identification and justification of the proper dose range for a subsequent and successful Phase III study that led to approval of a likely blockbuster drug. Our QSP team also completed some very important and large projects with large pharma partners. in multiple myeloma and pulmonary fibrosis that are already leading to follow-on work and license requests with the same clients. These projects emphasize the compelling value we provide our clients when we pair our software solutions with the expertise provided by our services consultants. We supported a client submission of new dissolution specifications, which were accepted by the EMA. A GASTRO Plus model was developed across multiple dose strengths of a commercial formulation and applied to support the development of a biopredicted dissolution method. With this dissolution data in hand, a safe space was established and used to justify dissolution acceptance criteria, which was wider than allowed specifications in the regulatory guidance documents. The EMA accepted the GastroPlus modeling results. The estimated return on investment from the regulatory flexibility using a GastroPlus PB-BM approach ranged from 12 to 45 times greater than the alternatives, which included running a clinical bioequivalence trial or doing nothing and wasting 10% of produced batches due to out-of-scope specifications. We supported a first in human dosing recommendation for a client that resulted in an investigational new drug or IND approval. In this project, animal PK data was utilized to build PBPK models to predict systematic and gastrointestinal concentrations for a new GI disease therapy. The validated PBPK model was then translated to humans to simulate local and systemic exposure and optimize the dosing recommendations needed to achieve target therapeutic levels in the colon and blood. The results were incorporated into the company's IND filing with the FDA and played a critical role in its regulatory acceptance to proceed with the phase one trials. As an example of the critical benefit our team of expert consultants provides, the client utilized its GastroPlus software to build and submit a model in support of a bio waiver request for a bioequivalence trial. The global agency review was harsh and the request was rejected. After resubmission following the expert guidance from our scientific experts, The agency responded with minimal questions, which were quickly addressed, resulting in the model being accepted and the BioWaiver granted. These are just a few examples of the value-creating work our team delivers, and it's testament to the significant value of our business model. Our customer-centric culture of innovation is driving results both for our customers and for our results. Looking ahead, we remain committed to our strategy that combines organic growth, operating leverage, and inorganic growth to create long-term value for our shareholders. This includes internal investments in product R&D, employee recruitment and retention, and enterprise technologies. From a corporate development perspective, we will continue to evaluate M&A and strategic investments that are in line with our criteria. While we have seen some positive signs surface in our market, we are setting guidance based upon a status quo outlook. For fiscal 2024, we expect revenues to increase in the range of 10 to 15 percent or 66 to 69 million dollars. From a mixed perspective, we expect software to contribute 55 to 60 percent of revenues and services to contribute 40 to 45 percent. reflecting the increased services revenue from Immunetrix. Further, we are guiding to diluted earnings per share in the range of 66 to 68 cents, or an annual increase of 35 to 39%.