This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: 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.
spk00: 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?
spk09: 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%.
spk08: And with that, I'll turn the call to Will.
spk04: Thank you, Sean. We have another strong quarter with total revenue increasing 33% to $15.6 million. with software revenue up 59% and services revenue up 8%. Software revenue represented 60% of total revenue for the quarter. For the fiscal year, total revenue increased 11% to $59.6 million, comprised of a 12% increase in software revenue and 8% increase in services revenue. Software revenue represented 61% of total revenue for the year. Total gross margin for the quarter improved slightly to 78%, benefiting from strength in the software segment. Software gross margin increased to 89% from 86% last year, while services margin decreased to 62%, primarily due to the addition of Immunetrics. Total gross margin for the fiscal year was flat at 80%, with software gross margin at 90%, and services margin at 65%. With the addition of Immunetrics, our overall gross margin may be impacted for fiscal 2024 compared to fiscal 2023. Now turning to software for the quarter. GastroPlus represented 54% of software revenue. Monolix Suite was 15%, AdMet Predictor was 21%, and other software was 10%. For the fiscal year, GastroPlus represented 54% of software revenue, Monolix Suite was 19%, AdMap Predictor was 19%, and other software was 8%. For the quarter, our customer renewal rate declined to 85% based on fees and to 80% based on accounts. Also for the quarter, average revenue per customer increased to $88,000 from $65,000. For the fiscal year, our customer renewal rate declined to 92% based on fees and to 82% based on accounts. Average revenue per customer for the fiscal year increased to $126,000, up from $110,000 last fiscal year. While the lower renewal rates are primarily driven by non-renewals from smaller biotech customers, one resulting benefit we are experiencing is an increase in average revenue per customer. Shifting to our services business, the services revenue breakdown for the quarter was 39% from PK PD services, 37% from QSP QST services, 20% from PBPK services, and 4% from other services. The services revenue breakdown for the fiscal year was 45% from PK PD services, 25% from QSP QST services, 23% from PBPK services, and 7% from other services. As a reminder, other services consist primarily of the regulatory services we provide customers to help them meet global regulatory compliance and quality requirements. We also provide comprehensive learning services focused on modeling and simulation training with a variety of options to help our customers succeed. Total services projects worked on during the quarter increased to 201 compared to 196 last year, and year-end backlog increased to $20 million compared to $16 million last year. Anticipated revenue from backlog within 12 months remains around 70 to 80%. Turning to our consolidated income statement for the quarter, We saw an increase in total R&D costs primarily due to the increased investment in the development of our software products, the increased cost of immunetics for the quarter, and from a general increase in personnel costs. Total R&D costs in the quarter increased to $1.8 million compared to $1.7 million last year. R&D expenses were $1.1 million compared to $0.8 million. and capitalized R&D was $0.7 million compared to $0.9 million. SG&A expense for the quarter increased by 51% to $11.5 million, or 73% of revenue, compared to $7.6 million, or 65% of revenue last year. This increase includes $1 million in M&A costs a $1.6 million compensation expense for Immunetrix related to its acquisition, an impairment charge of $0.5 million for discontinuing a trade name, and $1.3 million increase in personnel costs related to increased headcount and higher compensation costs. Excluding these expenses, SG&A expense would have been $8.4 million or 54% of revenue for the quarter. Income from operations resulted in a loss of $0.3 million for the quarter due to the M&A costs, immunitrix compensation expense, and impairment charge previously mentioned. Excluding these expenses, income from operations would have been $3.4 million or 22% of revenue for the quarter. Other income was $0.4 million this quarter versus $0.2 million last year due to returns from higher interest rates on our investment portfolio. Other income also included a $0.7 million accounting charge for the change in fair value of contingent consideration for the immunitrix earn out. For the quarter, income tax benefit was $0.5 million compared to expense of $0.1 million last year. Net income for the quarter decreased 44% to $0.5 million, and diluted earnings per share decreased to $0.03. Adjusted EBITDA increased to $4.9 million, and adjusted EBITDA margin was 31% compared to adjusted EBITDA of $2.5 million, or 22% margin last year. Adjusted diluted earnings per share for the quarter was $0.18 compared to $0.06 last year. We calculated adjusted EBITDA and adjusted diluted earnings per share by adding back interest, taxes, depreciation and amortization, stock-based compensation, gain or loss on currency exchange, any acquisition or financial transaction-related expenses, any asset impairment charges, and any tax provisions or benefits related to these items. We provide a reconciliation of these non-GAAP metrics to net income and diluted earnings per share, the relevant GAAP metrics, in our earnings release and on our website. Turning to our consolidated income statement for the fiscal year, our total R&D costs were $7.8 million, or 13% of revenue, compared to $6.4 million, or 12% of revenue last year. R&D expenses were $4.5 million compared to $3.2 million last year. Capitalized R&D was $3.3 million compared to $3.2 million last year. This reflects increased investment and personnel costs for the newest version of our monolith suite product version 2023 R1, which was released on February 28, 2023. the development of the next version of our GastroPlus product, GPX, and the development of the next version of our ADMET predictor, version 11, which includes significant enhancements to the artificial intelligent drug design, or AIDD module. For the fiscal year, SG&A expense increased by 39% to $34.7 million, or 58% of revenue, compared to $25 million or 46% of revenue last year. This increase was primarily due to a $5.4 million increase in employee and labor-related expenses. Additionally, the overall increase in SG&A expenses is due to an increase in merger and acquisition costs and the trade name write-off previously mentioned. Absent these costs, SG&A expense would have been $21.2 million for the year, or 36% of revenue. Income from operations decreased 39% to $8.7 million, while operating margin was 15% due to the M&A costs, immunitrix compensation expense, and impairment charge previously mentioned. Excluding these expenses, income from operations would have been $12.4 million or 21 percent of revenue. Interest in other income was $3 million versus $.2 million last year due to interest income of $3.4 million driven by the rise in interest rates this year. As previously mentioned, other income included $.7 million expense related to the Immunetrix acquisition. Income tax expense was $1.7 million compared to $2.6 million last year, reflecting an effective tax rate of 15% this year versus 17% last year. Our effective tax rate decreased mainly due to favorable foreign income tax rates for the fiscal year. We expect our effective tax rate for fiscal 2024 to be in the range of 20 to 22% without the tax benefit we saw in fiscal 2023. Of note, our fiscal 2024 EPS guidance of 66 to 68 cents reflects the higher estimated effective tax rate. If we were to realize the same effective tax rate as fiscal 2023, our guidance would be in the range of 72 to 75 cents. Net income for the fiscal year decreased 20% to $10 million, and diluted earnings per share decreased to 49 cents. Adjusted diluted earnings per share was 67 cents. The revenue impact for the fiscal year from foreign currency exchange was $0.6 million. Fiscal year adjusted EBITDA was $20.6 million, and adjusted EBITDA margin was 35%. compared to adjusted EBITDA of $21.5 million or 40% margin last year. Now, turning to our balance sheet. We ended the year with $115.5 million in cash and short-term investments. The change for the fiscal year was primarily driven by the addition of $21.7 million in free cash flow, less $4.8 million in dividend payments, $20 million for our accelerated share repurchase, and $9.7 million net cash paid for the Immunetrix acquisition. We continue to be well capitalized, have strong free cash flow, and seek opportunities for strategic acquisitions, investments, and partnerships. I will now turn the call back to Sean.
spk09: Thank you, Will. I'm pleased with the results we delivered in fiscal 2023. while navigating a challenging backdrop. I'm proud of our team's accomplishments this year. We successfully implemented our contract harmonization program, which is leading to greater visibility into revenues. We grew software double digits and saw good performance from our services business, with that team finishing the year with a 25% increase in our backlog. We completed our accelerated share repurchase program as planned as part of our overall capital allocation plan. We completed the acquisition of Immunetrics and are very pleased with how the integration is going. Immunetrics has a strong reputation in the immunology and oncology markets and has a healthy pipeline of activity, including new accounts sourced from our simulations plus customer base. Importantly, we achieved the guidance we provided last year by building stronger client relationships and maintaining our scientific leadership in model-informed drug development. This achievement was made possible by our team. We made critical investments in talent and added to our scientific resources to meet customer demand, while at the same time, we maintained good retention and strong recruiting. I'd like to thank all of our colleagues at Simulations Plus for their effort and dedication throughout the year. But I'd especially like to honor two people, Viera Lukakova, Chief Science Officer at the PBPK Business Unit for being named an AAPS Fellow, richly rewarded for her leadership in the development and advancement of PBPK. We thank her for her 18 years of service at Simulations Plus. And Amparo de la Pena, VP Pharmacometric Services who was recently elected to the International Society of Pharmacometrics, or ISOP, Board of Directors. A talented and esteemed team here at Simulations Plus create value for our clients every day to help develop safer and more effective drug solutions. The spirit of innovation and energy to do more is strong. To conclude, the underlying fundamentals of our market are resilient. We are growing revenues, delivering profitable growth, and generating cash. We're well positioned to meet our goals for fiscal 2024. Thanks for your time today. And with that, I'll turn the call over to the operator for questions.
spk03: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk08: Thank you.
spk03: Our first question is from Francois Bruce-Blanc with Oppenheimer. Please proceed with your question.
spk01: All right. Thanks for the question. So I'm just wondering, in terms of the challenging environment, obviously biotech funding is you know, to be difficult. I was just wondering, when you talk about your guidance for next year, you mentioned that it would be status, you know, that's with the idea that it's status quo of what's going on. Maybe the 10 to 15 percent, can you just remind us maybe of the immunetics and kind of the targeted milestones or revenues that you're hoping to get there? Why it keeps the guidance in the 10 to 15% range on the revenue side for next year. Thank you.
spk09: Yeah, sure, Frank. Yeah, the marketplace itself, we always have a very good data flow at this time of the year as our clients are in that budgetary cycle running towards the end of the calendar year. Budgets for next year are being put together. Always get a good weaponist test in terms of the market, twofold. One, in terms of those calls that we get in terms of budget spend before the end of the year, and as well, quoting processes for inclusion in budgets next year. In both regards, I'd say we've gotten some good input, positive frequency of those conversations taking place. Certainly when you look back and compare it to last year, it's more active, more positive than it was last year. but not enough to, you know, kind of look forward and say that, you know, the market has changed. So status quo comments in the context of our guidance is that, you know, we kind of looked out to 24 and built our guidance based upon status quo, a similar sort of market environment with biotech funding being where it is in the last number of quarters. and cautiousness in terms of large pharma budgets into 2024. Immunetrics has been a great addition. And, you know, certainly in the short window of time that they've been on board, biggest impact in terms of our pipeline, being able to take their expertise, their customer base in immunology, oncology models, Bringing them on board certainly brought some backlog into the picture. Most positive has been the embrace out of our customer base in terms of presenting the new capabilities in those therapeutic areas to them. And that's filled the pipeline disproportionately in our QSP business at this point in time. So that provides good momentum going into next year. minimal contribution to revenue given the timing of the acquisition here in the fourth quarter. We look for contribution next year. Setting the guidance at 10 to 15% for next year gives us the opportunity, if I am, to increase our growth rate next year by 50%. And that certainly would be contributed to by Immunetrix. They've got Part of the acquisition agreement was an earn-out outlook, an earn-out that would be achieved if they hit revenue targets of five, six million in the 2023 timeframe and eight million in the calendar year 24 timeframe. So they could contribute significantly. At this point in time, in terms of that market, We're being cautious in terms of their contribution going forward, but they certainly provide a boost to our outlook into next year. So overall, I wanted to go into the year with guidance that was not based upon any sort of uptick in the overall market, give us some benefit from the momentum that we seem to be carrying into the next year, give us some momentum in terms of the contribution and the efforts we'll make, uh for the business uh next year and uh in feb 10 to 10 to 15 with 11 performance this year and that gives us uh you know a perspective of uh yeah we likely will do better uh within that range okay great thank you and then just maybe to uh remind everyone that the harmonization of the contracts and renewals can you just remind us what that process was and and you know how we're coming to the end of it and why that helps get clarity on revenues going forward thanks sure sure no the uh harmonization process was a process that mutually our clients and from our perspective we saw benefits from taking those clients that over the years that accumulated multiple licenses within a single platform or multiple licenses across the multiple platforms of our three primary software products, Gaster Plus, Admin Predictor, and Monolix, and working with them to consolidate those differing license renewal dates across an entire year in some cases, and identify a focal date to bring them together so that all of the renewal activity would be within one timeframe. mostly larger accounts, obviously, those that have multiple licenses. And that had an impact last year, an impact of pushing renewal dates around our seasonality, which had typically been low first and fourth quarter revenues and high second and third quarter revenues. As you look back over this past year, that resorted itself into an even lower first quarter, but then even more evenly dispersed on an absolute dollar basis, second through fourth quarter. And so through one year's cycle time of renewals, we've achieved that harmonization across most of our large accounts. There'll still be more of those events that take place next year. Another account may reach that threshold where can we harmonize But it won't be the number of accounts that disrupted the seasonality in 23 in the future in 24. So I think we've reset ourselves into a new seasonality pattern that will hold in 24 and beyond.
spk08: Thank you. That's it for me.
spk03: Thank you. Our next question is from Matt Hewitt with Craig Hallam. Please proceed with your question.
spk02: Good afternoon and thank you for taking the questions. Maybe first up, and maybe it touches a little bit on the harmonization. How should we be thinking about cadence in fiscal 24? Should we anticipate maybe a little bit of a step down here in Q1, just with some of the holidays and whatnot, maybe the services revenues are a little bit lower, but then kind of bouncing back up and more of a flattish the remainder of the year in line with your revenue guidance for the year? How should we be thinking about the cadence?
spk09: Yeah, I mean, I think that's fair, Matt. First quarter was a lower quarter last year, and even historically before that, it's made more dramatic by the arminization process last year. So yeah, revenues in the first quarter of 24 likely be, in comparison to second, third, and fourth quarters, the lowest quarter, second, third, and fourth quarter should be relatively comparable level in terms of absolute dollars. On a year-over-year comparison basis, I mean, we're comparing a length seasonality in 24 to a seasonality in 23. So on a revenue growth percentage basis, that cadence should be a little bit more consistent as we work our way through next year. We focus on software, and that is 60% of the revenue flow. On the service side, the slowest of quarters is usually our fourth quarter, impacted tremendously by the summer season, both in the context of our own staff taking some time off, but our client staff taking time off, which has a tendency to slow projects, project activities. That's why in this last fourth quarter, the percentage of projects were mostly fixed-price projects. Time and materials are more an interactive delivery, and if the client's on vacation, he's not calling up for time and material support projects. First quarter is usually a little slower on the consulting side, too. That's driven. Holidays is a piece of that, but it's also driven by first quarter is conferences. Our industry conferences, most significant ones, take place. There's one taking place right now in Orlando. There's another in a couple of weeks, the first week of November. So service revenue is a little bit more bell-shaped curve, if you will, in terms of first and fourth quarter, typically a little bit lower.
spk02: Got it. That's super helpful. And then maybe looking at the backlog, obviously there was a nice pop there. Some of that was contribution from Immunetrix versus sounds like the rest of that was just, you know, solid effort from your sales and marketing team. Is there any way to break out the contribution from Immunetrics into your backlog?
spk09: Yeah, we've not broken out Immunetrics aside, we've not broken out the backlog historically by a business unit in terms of the disciplines of PKPD and QSP and PPPK. It was, I can say this, it was, yeah, Immunetrics contributed a bit, but... You know, there we're dealing with a handful of accounts and a handful of projects. So while it's an addition, it's not the most significant. I'd say the most significant community there was a record quarter in terms of bookings on the PKPD side. I think it was the largest in our history, although we didn't go back all the way to early records there. Very good quarter in terms of that discipline. number of projects that are teed up beginning in the first quarter here, but certainly in the early part, early half of fiscal 24. So the largest contributor to that backlog increase was out of the PKPD business.
spk02: Got it. And then maybe last one, and then I'll hop back into Q. Regarding the cross-selling opportunities, it sounds like there's been a very positive reception of And it goes both ways. It sounds like both with your installed base as well as with the Immunetrix customers. But are you having some early success on the actual cross-sales, or is this more about building those relationships and kind of introducing them to the full product offering? Thank you.
spk09: Yeah, I'd say, Matt, the biggest activity is within the QSP space. In terms of the disciplines, the therapeutic areas, I should say, on the immunetics side, providing visibility to our customers that don't overlap with theirs, the capabilities that we now have, and adding names and opportunities to the pipeline to sell immunetics models into that client base. In the other direction, Immunetrix comes to us with a small number of clients, less than one digit in terms of total clients. And many of those are large pharma that are customers of our other platform software products, et cetera. So cross-selling into their installed base is a benefit, but not a big contributor to the biggest contributor is in the direction of bringing human metrics models into our much larger client base and creating opportunities to sell those models through to that community.
spk08: Got it. All right. Thank you.
spk03: Thank you. Our next question is from David Larson with BTIG. Please proceed with your question.
spk06: Hi, can you talk a little bit about like GastroPlus? I think you had 10 new customers, which looked very good. I think that compares to like four in the previous quarter, and it was the highest quarter, I think, of the year, maybe in the past two years. And then, you know, 11 upsells, which also looked good. But I think your revenue actually for GastroPlus maybe declined sequentially in despite the large number of new customers and upsells, can you just talk a little bit about what drove that? And is it the renewal rates based on both fees and accounts?
spk09: Yes, it's a couple of things there, Dave. One, yeah, you know, sequential quarters, keep in mind that the revenue for a software revenue for a given product or total or software revenues from quarter to quarter because of, you know, it's, it's, it's not a, uh, it's a recognition entirely upfront, um, 12 month license revenue taken on day one. Um, so it doesn't build upon itself. And from third quarter to fourth quarter, you're really dealing with what's the population renewals in that quarter driving that number. And so I think, you know, while, you know, the harmonization process left us in absolute dollar revenue level equivalency in second, third, and fourth quarter, I think there's a little high going to be a little higher than fourth quarter. And that contributed there as well. However, as well, in the fourth quarter, we saw a couple of non-renewals that impacted the renewal rate numbers that you saw. were lost opportunities through M&A activity. And so that brought the fourth quarter down from where it could have been, and those two acquisitions not contributed to the mix. There were a few biotech non-renewals and a couple of CRO non-renewals. There were a couple of QSP licenses, relatively small dollar amounts, but the programs for which they were being used So we had a few non-renewals in the fourth quarter that contributed to those renewal rates coming down. You know, our typical experience here, often those M&A events lead to ultimately when the two companies sort themselves out fully. Those discussions reinvigorate and can come back to us. So they are now in our pipeline, if you will, and some of that can come back to us down the line. But oftentimes the immediate reaction, once the combined organizations come together in an environment right now, let's not renew and then we'll look at it down the road when the dust settles. So a few impacts from non-renewals in the fourth quarter or those numbers could have been higher.
spk06: Thanks very much. That's very helpful. If you had to guess how much the M&A impacted revenue in the quarter, is there any sort of guess or ballpark figure? Could it have been half a million bucks, a million bucks, just any sense for that?
spk09: I didn't know that that's a level of sort of estimations I want to get into. You could go back and you could say, geez, our historical renewal on fee rate is is X and it was Y in the fourth quarter. And he probably, you know, come to an estimate there of that magnitude impactful, you know, and like I said, would look forward to 24 playing out and we might see some of that revenue come back to us.
spk06: Okay. And then in terms of price increases, just any color on what you would expect to see in fiscal 24 and what you were able to realize in fiscal 23. And then along sort of related to that would be sort of wage inflation for your own scientists. Like do you have to increase prices in order to cover more wage inflation or is it a more tempered environment heading into next year? Any thoughts there would be very helpful.
spk09: Yeah, no, good question. Top line first in terms of price increases, you know, as we've stated before, we were more aggressive during fiscal year 23 than we had been in the past. And, you know, certainly was an environment with, you know, macroeconomic inflation down to specific market compensation increases in the industry for the scientific community in question here. made that increased price increase at least understandable as to its starting point not that it didn't come with you know negotiation and pushback but we yielded you know very well in that environment and I think it speaks to capabilities of our team that we put together in terms of our client-facing organization as well as the partnership we have with our clients. They're accepting of, hey, those increases come back and are returned back to them in terms of they continuing to fund a very robust delivery out of our R&D organization with higher quality, more functionality down the road. um so our yield uh was doubled in in 24 versus 23. uh that price increase was twice as much as it typically has been in the past as we turn to 24 a little bit different market inflation is still present out there still though with an environment in which uh Our clients are pretty, you know, budget constrained. And the biggest difference is that on the other side, the expense side, there's been a settling down of the marketplace in terms of the cost of scientists in this field and the job hopping that somewhat contributes to inflated compensation offers out there has settled down. And so certainly that momentum goes away. And our expectations in 24 return back somewhere between 22 and 23 in terms of anticipated price increases as we go forward into next year. So good yield in 23 in terms of price increase, more significant than in the past. Still expect contribution from crisis increases. We go into 24, but not to the level of 23. On the expense side, I've kind of said the story. Compensation in this community has settled down. And while there is naturally some merit increase that takes place from year to year, it's not a stagnant situation. salary environment, but it's nothing compared to the year prior.
spk07: Okay. Thanks very much. That's very helpful.
spk08: Thank you.
spk03: Thank you. Our next question is from Dave Lindley with Jefferies. Please proceed with your question.
spk05: Good evening. Thanks for taking my question. Just a couple of quick ones and I think bigger picture. Sean, I'm wondering if the IRA and the changing incentives from that and the potential to kind of restack pipeline priorities presents an opportunity for biosimulation to help in that restacking or reevaluating of opportunities or pipeline priorities that might change because of differential incentives on large or small molecules.
spk09: You know, the world of modeling and simulation participates on both sides, and actually the sort of development of modeling applications on the large molecule or biologic side sort of second in line in terms of most of our work was in small molecule historically. And so it's... a smaller base of activity that is growing quite rapidly, quite frankly, just as the investment and volume of programs in biologics, large molecules, has increased. So I think as we move forward into the year, we need to continue to meet the demands of providing technology and capability and scientific support on the biologic side. and are doing so. And I see that as a good disproportionate contributor to our growth going forward.
spk05: Got it. Thank you for that. And then in your prepared remarks, you talked about, I think it was a PBPK client example at the IND stage. And I know that I've seen parts of your company present or you know, market at Society of Toxicology. So I know you have a role to play in that earlier stage. And I'm wondering if the difficulties for biotechs, particularly large molecule, to get access to non-human primates in that safety assessment stage, if that has percolated to opportunities for your business and simulation to try to, you know, get around that bottleneck in the supply chain.
spk09: That certainly is a capability, an issue that we can address. Our ability and the precept models in terms of species within GastroPlus, for example, provide tremendous impact in terms of situations where animal studies are looking to be reduced in terms of population size and the ability to turn around predict off of smaller populations into humans. So, yeah, no, it's certainly something that's having a positive impact in terms of our communications with clients and pipeline opportunities.
spk05: Super. Thank you again for taking my questions. Have a great night.
spk08: Yeah, you too. Thanks.
spk03: At this time, there are no further questions. I would like to hand the floor back over to Mr. Sean O'Connor for any closing comments.
spk09: Well, thanks, everyone, for your attention. Good year on our part. I feel very cautiously optimistic, I guess is the buzzword, as we enter 2024 with some good momentum coming out of this past year and a great team on board that performed very well this past year and look forward to their continued contributions into next year. Thanks for your attention. I look forward to talking to you again soon. Take care.
spk03: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer