Simulations Plus, Inc.

Greetings and welcome to the Simulations Plus fourth quarter and fiscal year 2024 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 Lisa Fortuna from Financial Profiles. Ms. Fortuna, you may now begin.

Good afternoon, everyone. Welcome to the Simulations Plus fourth quarter and fiscal 2024 financial results conference call. With me today are Sean O'Connor, Chief Executive Officer, and Will Frederick, Chief Financial Officer and Chief Operating 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 -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 and 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, I'll turn the call over to Sean. Please go ahead.

Thank you, Lisa. Good afternoon, everyone, and thank you for joining our fourth quarter in fiscal 2024 conference call. Our

team delivered

strong results in 2024. Total revenue increased 18% year over year and 14% on an organic basis, excluding the fourth quarter contribution from proficiency. The organic growth rate was above the .5% growth rate we achieved in fiscal 2023, and at the high end of our guidance provided at the beginning of the fiscal year. Full year diluted EPS of 49 cents exceeded the high end of our guidance range of 46 to 48 cents.

Turning

to

key

highlights of the year, as an industry leader in bio simulation software tools, we continue to improve our competitive edge during fiscal 2024 with major upgrades across our platform supporting PVPK, PKPD, and drug discovery. Our release of GPX in May significantly enhanced our flagship gastro plus PVPK platform with advanced models, refined algorithms, and integrated machine learning technology. Gastro Plus Plus X greatly enriches the user experience with an intuitive interface, streamlined workflows and faster process. In May, we released Monalik Suite 2024. This release included integrations, presets, and other upgrades that make the software easier and faster to run, allowing scientists to spend less time on programming and more on exploring models and simulation results. In July, we released Admet Predictor version 12, our machine learning cheminformatics platform in support of drug discovery. The release included enhanced models with greater predictive accuracy and expanded high throughput pharmacometrics capabilities amongst other new features. During fiscal year 2024, we continued to supplement our organic growth with strategic acquisition accomplishments. We completed the integration of our June 2023 acquisition of Thimianetrics. The combined scientific resources and therapeutic area coverage positions us as a clear leader in the fast growing area of quantitative systems pharmacology. The 57% growth in fiscal year 24. This June, we acquired Proficiency, the largest and most significant acquisition in our company's history. The transaction doubles our TAM to $8 billion and significantly expands our market opportunity. This addition enhances our ability to support clients across clinical operations, medical affairs, and commercialization. Our comprehensive suite of innovative solutions now spans the entire drug development continuum and uniquely positions us to drive growth and profitability. Next, I'll spend a moment on the macro environment, which we realize is an area of particular focus for the financial community. Spending environment for pharma and biotech has been cost and funding constrained for a second fiscal year. Current leading indicators, including pharma budgets, clinical trial activity, funding activity, and others, provide a mixed bag of metrics for the next year, but suggest a potentially improved environment compared to the last two years. We continue to observe a wide range of activity levels among our clients, many who are engaged in their internal calendar year 25 budget preparation process. Although we are encouraged by some positive initial budget discussions for 2025, we are entering the year with cautious optimism. Our guidance for fiscal year 25 is based upon current market conditions continuing, but we will be prepared to take advantage of any improvement in our client's spending during the year. Turning to our software segment, software revenue grew by 12% for fiscal year 24, 9% on an organic growth basis. Software revenue grew by 6% for the fourth quarter and decreased 6% on an organic growth basis. Kim Informatics Business Unit revenue grew 6% for the year and 1% in the fourth quarter. During fiscal year 24, we have grown the number of clients utilizing the AIDD module to 15 of our total installed base of 110 Admet Predictor clients. Physiologically based pharmacokinetics or PBPK business unit, revenue increased 7% for the year and decreased 8% in the fourth quarter. GastroPlus continues to grow well despite some renewal slippage in the fourth quarter and ongoing softer growth in the Asian markets. Clinical Pharmacology and Pharmacometrics or our CPP business unit, revenue grew 18% for the fiscal year and 20% during the quarter. Monalix continues to increase its market share and displace its main competitor as the PKPD platform of choice. Revenue in our quantitative systems pharmacology or QSP business unit grew 7% for the year yet decreased 67% for the quarter. As a reminder, quarterly results can be lumpy for QSP software based upon the high ticket price per license and a smaller pool of end users. Revenue in our adaptive learning and insights or Ali business unit was 1.1 million for the fourth quarter, generally in line with our expectations. Revenue in our medical communications or MC business unit was $100,000 for the fourth quarter, also in line with our expectations. Turning to our services segment, services revenue grew by 26% for fiscal year 24, 21% on an organic basis. Services revenue grew by 39% for the fourth quarter, 21% on an organic basis. We're pleased with this result given client cost constraint measures typically impact external service budgets as clients may eliminate project work or delay execution in tighter funding environments. Performance was especially strong in our CPP and QSP business units. CPP business unit revenue was strong, up 19% for the fiscal year and up 28% in the fourth quarter. QSP business unit revenue grew 57% for the year and 32% in the fourth quarter. PBPK business unit revenue decreased 5% for the fiscal year and 6% for the fourth quarter. We continue to encounter client source data delays impacting the initiation of contracted projects in this space. Medical communications revenue was 1.1 million in the fourth quarter. This contribution was less than anticipated due to higher revenue recognized in the quarter prior to our acquisition, as well as some project timing delays. Turning to an update on proficiency, as a reminder, proficiency provides experience and content simulation developed with AI technologies to enhance clinical trial success, data analytics and medical communications, both in the regulatory approval process as well as post-approval commercialization. Ultimately, these activities support increased confidence in regulatory success for our clients. In addition, proficiency meaningfully expands our customer return on investment by helping them achieve accelerated clinical trial cycles, reduce protocol deviations, reduce costs to clinical trial operations and improve market awareness. The combined product and service portfolio results in offerings across the pharma value chain. Software offerings from proficiency include proficiency performance management, an adaptive learning platform that uses life-line simulation and detailed data tracking to increase recruitment, retention and protocol compliance during clinical trials. In simulations of complex real-world scenarios, learners are asked to make decisions and practice implementation of the trial protocol. The data generated provides insight into areas of the trial protocol that are unclear to healthcare practitioners, enabling clarification and further education prior to the start of clinical trials. Panorama KOL Insights is a platform for key opinion leaders, research in the life science industry. It provides current information about influential industry leaders, which can be filtered by criteria including, but not limited to, therapeutic expertise, professional affiliations and geographical location. We're pleased to report that the integration process is tracking ahead of plan across all fronts. As previously announced, we formed two business units, adaptive learning and insights to carry forward with our clinical simulations business led by Jenna Rouse and medical communications led by Murray Alford, who do address medical affairs and commercialization support for our clients. On the sales and marketing front, our combined -to-market strategies and lead generation are underway. We expect these efforts to contribute to business development opportunities. Together, our scientific and technological capabilities are expected to deliver enhanced products and services, which further benefit our clients. And additionally, we have integrated our back office, financial, operational, general and administrative organizations, which we expect will contribute to efficiencies and expense safety. With that, I'll turn the call over to Will.

Thank you, Sean. To recap our strong fourth quarter performance, total revenue increased 19% to $18.7 million, including a $2.3 million contribution from proficiency. Software revenue increased 6%, representing 53% of total revenue. And services revenue increased 39%, representing 47% of total revenue. Fiscal year total revenue increased 18% to $70 million. Software revenue increased 12%, representing 59% of total revenue. And services revenue increased 26%, representing 41% of total revenue. Turning to the software revenue contribution from our products for the quarter, GastroPlus was 49%, Monolink Suite was 17%, Admet Predictor was 18%, and other products were 15%. For the fiscal year, GastroPlus was 53%, Monolink Suite was 20%, Admet Predictor was 18%, and other products were 9%. For the year, our software customer renewal rate was 93% based on fees and 84% based on accounts, both increasing slightly compared to the prior year. Average software revenue per customer for the year increased to $129,000. Shifting to our services revenue contribution by business unit for the quarter, CPP was 36%, QSP was 35%, PBPK was 17%, and MC was 13%. For the fiscal year, CPP was 43%, QSP was 31%, PBPK was 23%, and MC was 4%. Total services projects worked on during the quarter were 250. Year-end backlog decreased to $14.1 million, primarily impacted by two sources. First, there were some service contracts that slipped into September, and in the first two weeks of fiscal 2025, we've already closed more than $3 million of these. Second, we adjusted the backlog in the fourth quarter this year to remove open contracts that have been delayed, where there's still uncertainty regarding when the customers will resume the projects. As a result, anticipated revenue from backlog within 12 months increased to approximately 90%, compared to 70 to 80% at the end of last year. Total gross margin for the fiscal year was 62%, with software gross margin at 84%, and services gross margin of 30%. The -over-year decline in gross margin was primarily due to the reclass of operating expenses with the reorganization of our internal structure, the full-year expense impact from the immunetrics acquisition last year, and the additional expenses from the proficiency acquisition this year. Turning to our consolidated income statement for the quarter, R&D expense was 10% of revenue, compared to 7% last year. Sales and marketing expense was 14% of revenue, compared to 11% last year. G&A expense was 19% of revenue, compared to 63% last year. The G&A expense variance was primarily due to the reclass of expenses this year to cost of revenues, reflected in the reorganization of our internal structure mentioned at the beginning of the year. We also made a true-up of all international services related expenses for the year in the fourth quarter. G&A expense for the fourth quarter also included $1.7 million of transaction-related expenses for the acquisition of proficiency this year, and included $2.5 million of transactions-related expenses for the acquisition of immunetrics last year. The transaction expenses related to immunetrics last year included a $1.6 million compensation expense. Total operating expenses were 43% of revenue, compared to 80% last year, primarily due to the reclass of expenses to cost of revenue this year, offset by the addition of expenses related to proficiency this year. Loss from operations was negative 6% of revenue, compared to negative 2% last year, and income before income taxes was 5% of revenue, compared to 0% last year. Other income was $2 million this quarter, compared to $0.4 million last year, primarily due to a decrease in the fair value of the immunetrics earn-out liability this year. Net income for the fourth quarter was $0.8 million, or 5% of revenue, compared to $0.5 million, or 3% of revenue last year. Deluded EPS was 4 cents, compared to 3 cents last year, and adjusted diluted EPS, excluding the impact of transaction-related costs, were 6 cents, compared to 18 cents last year. This -over-year change was primarily driven by the transaction-related expense add-back to diluted EPS in Q4 last year, being larger than the add-back in Q4 this year. Fourth quarter adjusted EBITDA was $4.1 million, compared to $4.9 million last year, at 22% and 31% of revenue, respectively. We calculated adjusted EBITDA by adding back interest, taxes, depreciation and amortization, stock-based compensation, gain or loss on currency exchange, any acquisition or financial transaction-related expenses, and any asset impairment charges. The reconciliation of this non-GAP metric to net income, the relevant GAP metric, is in our earnings release and on our website. Income tax expense for the fourth quarter was less than $0.1 million, compared to income tax benefit of $0.5 million last year, and our effective tax rate was 2% compared to 674% in the prior year period. As a reminder, we true up our annual income tax estimate in the fourth quarter each year, which impacts the effective tax rate in the quarter. Turning to our consolidated income statement for the fiscal year, R&D expense was 8% of revenue equivalent to last year. Sales and marketing expense was 13% of revenue, compared to 11% last year, primarily due to our increased investment in sales and marketing. G&A expense was 32% of revenue, down from 47% last year. G&A expense for the year included $2.6 million of transaction-related expenses for the acquisition of proficiency this year, and included $3.3 million of transaction-related expenses for the acquisition of immunetrics last year. Total operating expenses were 53% of revenue, compared to 66% last year. Income from operations was 9% of revenue, compared to 15% last year. And income before income taxes was 18% of revenue, compared to 20% last year. Other income was $6.3 million during the year, compared to $3 million last year, primarily due to an increase in interest income, and the previously mentioned decrease in the fair value of the immunetrics earn-out liability. Net income for the fiscal year was $10 million, or 14% of revenue, compared to $10 million, or 17% of revenue last year. Deluted EPS was 49 cents, equivalent to last year, and adjusted diluted EPS, excluding the impact of transaction-related costs, were 53 cents, compared to 67 cents last year. Adjusted diluted EPS was lower than expected, primarily due to the lower transaction-related expense add back to diluted EPS in the fourth quarter. Fiscal year adjusted EBITDA was $20.3 million, compared to $20.6 million last year, at 29% and 35% of revenue, respectively. Income tax expense for the fiscal year was $2.5 million, compared to $1.7 million last year, and our effective tax rate was 20%, compared to 15% last year. We expect our effective tax rate for fiscal year 2025 to be in the range of 23 to 25%. Turning to our balance sheet, we ended the year with $20 million in cash and investments. We remain well-capitalized with no debt and strong free cash flow to execute our growth strategy. I'll now turn the call back to Sean. Thank you,

Will. We're very pleased with our 2024 performance and our results reflect strong execution in both our software and service segments. Also, the integration of the most significant acquisition in the history of our company is progressing ahead of our expectations. Moving on to our outlook for fiscal 2025, based upon current market conditions, our organic growth is expected to be in the range of 10 to 15%, consistent with fiscal year 24. In addition, the proficiency acquisition is expected to contribute $15 to $18 million, consistent with the range we previously provided. Our guidance for fiscal 2025 is as follows. Total revenue between 90 and $93 million, year over year revenue growth in the range of 28 to 33%, software mix between 55 and 60%, adjusted EBITDA margin between 31 and 33%, adjusted diluted earnings per share of $1.07 to $1.20. We're providing guidance on adjusted diluted EPS versus diluted EPS, consistent with guidance practices for our industry. For comparison purposes, our adjusted diluted EPS guidance translates to at or above our fiscal year 24 diluted EPS of 49 cents. Of note, our guidance does not include the impact of any future acquisitions. As a reminder, our first fiscal quarter is historically our lowest revenue quarter due to the seasonality of our revenue streams. As such, diluted EPS could dip below breakeven and although diluted adjusted EPS will be above the diluted EPS level, we still expect some impact. We anticipate higher revenues in the remaining quarters of fiscal 2025 as we have had in the past, resulting in higher profitability in the remaining quarters of our fiscal year. Our near term priorities include completing the acquisition integration, expanding cross-selling opportunities, and driving towards our historical adjusted EBITDA margin target of 35 to 40% in correspondingly profitable profitability levels. We are well positioned to achieve our goals this year and remain focused on executing our discipline growth strategy to deliver long-term value to our stakeholders. Thank you for your time today. With that,

I'll turn the call over to the operator for your questions. Thank you. We'll now be conducting

a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two 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. Thank you. Our first question is from Max Smock with William Blair. Please proceed with your question.

Hi, great. Thank you for taking your question. Our first one is just hoping you can give an update on staffing and services. I recall that very low attrition rates in the business have been weighing on margins. So, curious if this trend has continued over the last few months and what your hiring plans look like in 2025. Basically trying to get at when we can expect utilization to improve and how we should think about the cadence of margin progression in 2025.

Yeah, thanks for the question. Yeah, as we indicated last conference call, our back-up profitability in Q3 and Q4 was impacted as we hiked to our plan, but attrition that we baked into that plan was much less than anticipated and that has contributed to some pressure in terms of margins in the service business in the back half of the year. Continued into the fourth quarter. We have, since this became more visible, adjusted our recruiting plans on a go-forward basis and anticipate that we'll get back in line, if you will, with a matching of the capacity and revenue streams on the service side in the first half of fiscal 2025. So, a little bit of pressure in the first half of next year, but believe that improvement will be gradual and through the first half and into the second half, we should be back on track. And it's reflected in our guidance of 31 to 33% EVA dollar margin and that improvement through the course of the year.

Great, thank you, that's really helpful. And then just one on proficiency in terms of its competitive moat. So, given that we have seen a continuing trend and expectation for more trials to be run by CROs and given that proficiency doesn't sell into CROs, do you see this as limiting the size of your business opportunity in the space?

No, no, I mean, the marketplace that they sell into is in support of pharma clients and their clinical trials. In association with the CROs that are out there, we are complimentary to their services, competitive to those that do offer this sort of comparable, if you will, training type of capabilities, but the proficiency offering is pretty unique in terms of both its training module development and the software platform that supports it in terms of its delivery and the impact on adherence to clinical trials. So, clinical trial uptick in 2025 would be a favorable indicator for the proficiency business. And it sells through in a marketplace alongside CROs in competition with some CROs, but that's the same marketplace that it's been selling into and succeeding the last number of years.

Great, thanks for the color there. And then lastly, just a quick modeling question. Sorry if you already said it and I missed it, but how much did Immunetrix and Proficiency contribute to total sales in Q4? And also, what is this breakdown in terms of software versus services? Asking, because based on the press, it seems like the inorganic contribution was much lower than we would have thought in the fourth quarter. So, if this is the case, can you discuss the dynamics around this?

Proficiency's contribution came in a bit below the $3 million expectation that we had that came in about 2.1, 2.2 million revenue in the second quarter, primarily in terms of the medical communication side, where our anticipation of how much of the project revenue, the service revenue from medical communications would be recognized in the quarter prior to our close of the transaction. Obviously, we don't pick up the revenue flow from those projects until close, which was mid-June timeframe. So, that recognition at the beginning of the quarter was a little bit greater than we anticipated. And then secondly, yeah, they were subject to some of the delays that we see across our service business in terms of some projects being pushed out. So, 2.1 in terms of the proficiency contribution to the fourth quarter. And it does not change our expectation in terms of 15 to $18 million contribution in 25. Amy Netrick's fourth quarter contribution, I don't have a fourth quarter, is not a acquisition revenue. They had fourth quarter contribution revenue in 23, as well as fourth quarter 24. Our integration of that business now is pretty well complete. And we're servicing those opportunities from the combined staff of our two organizations. So, don't have a breakout of that for the fourth quarter.

No, that was all really helpful. And just as you were talking, I thought for 2025, kind of a similar question on proficiency, it seems like you're counting proficiency revenue as all inorganic, despite it kind of closing, like you said, in the fourth quarter. So, just hoping that you can help us bridge your organic versus inorganic growth expectations for next fiscal year, and if you can, buy both software and services.

Yeah, don't provide it other than our expectation that the software will be in the range of 55 to 60% of our total revenues. Don't have a breakout in terms of software versus services, but our, let's call it SLP legacy business, everything except proficiency, our guidance is based upon the assumption of that organic growth will be in the 10 to 15% range, similar to our guidance for last year, fiscal year 24, which was 10 to 15% for which we came in at about 14%. Percent growth, and then 2025 proficiency contribution should be in that range of 15 to 18 million above that.

Great, thank you so much.

Sure.

Thank you, our next question is for Matt Hewitt with Craig Hallam, please proceed with your question.

Good afternoon, thanks for taking the questions. Maybe first up, could you help us bridge the gap on your EPS guidance for next year? Just trying to figure out, it's significantly higher than then I was modeled, than the street was modeled, I'm just trying to figure out what the delta is there, thanks.

Yeah, I think it's in the context of the two line items of adjusted diluted EPS versus diluted EPS. We've added adjusted diluted EPS as it seems to be the commonality with our peers so that there could be some comparability. Willie, do you wanna provide some color in terms of the differential there?

Sure, thanks for the question,

Matt.

And I would refer to the reconciliations that we have in the press release. One of the things we did for FY24 is we've got the reconciliation of adjusted EBITDA to net income. And for the most part, we've got typical exclusions there that we've communicated in the past. The adjusted diluted EPS to diluted EPS, we've really just taken transaction related expenses as the adjustment. And based on the feedback we were getting from folks as well as sort of comparative in the industry, it made sense to standardize in FY25, so for this next fiscal year, to just have the reconciliation items that are in the adjusted EBITDA be the same adjustments that are gonna be for the adjusted diluted EPS with the tax impact as well. So FY24 was just an adjustment for transaction related expenses. FY25 will have a consistent approach with the way we do the adjusted EBITDA, just to simplify it.

That's helpful, but I guess I was looking for, I mean, are you expecting $5 million in acquisition related expenses? There's a pretty big delta from where everybody was before on an adjusted basis to your new guidance. That's a pretty big step up, and I'm just trying to figure out what is the bucket that you're seeing the big increase. I'm guessing it's M&A expenses, but I just wanna make sure I'm thinking about this right.

Yeah, right now we don't have any M&A expenses assumed in the guidance we mentioned, it excludes any acquisition. So to the extent that if you look through the EBITDA reconciliation, the big drivers there are depreciation and amortization expense and stock comp expense. I mean, those combined were about 11, $12 million in FY24, and we'll have an increase with the additional intangible amortization from the proficiency acquisitions. So that total probably goes to about $14, $15 million of adjustments.

Got it, all right. And then shifting gears, Sean, if you could provide a little bit of an update on how the integration with proficiency, particularly on the sales and marketing efforts, are those teams, have they been fully trained at this point? What are the cross-selling pipelines looking for? Thank you.

Yeah, we've integrated the sales and marketing personnel that came to us in the acquisition for proficiency into our consolidated business development team and undertaken training, dissemination of presentation of capabilities to bring people up to speed in terms of our new products and services that come into fold. Out in the marketplace, we've transitioned over the last couple of years. Our sell-through points historically have been the discovery department for Admet Predictor, and then primarily the modeling and simulation organization on the clinical side. Previous to this year, we invested time and effort in expanding to a third touch point, the clinical management teams, that consolidated group of personnel that manage a drug program of which the modeling and simulation representative had a seat at that table. But extending our relationship into that area, I think has been one of the keys to supporting our pretty healthy service growth in a very challenged market environment. And that has been the result of identifying opportunities to impact positively a drug program that perhaps the modeling and simulation department has been already used up, has been cut, but certainly cost-constrained environment has made those budgets a little tighter. We opened ourselves up for our service business to be funded out of the clinical trial budget. And that, I think, has supported and put wind in the sail of our success on our service side during a challenging time. Long-winded intro into through proficiencies acquisition we're now undertaking that same extension out to their touch points, which are the clinical operations team and the medical affairs team within our clients. And so, first step in terms of engagement in the marketplace externally from the company is to start extending those networks and building those relationships into those new budget opportunities that are available to us. And that's going very well. I mean, we're three months after the close of the acquisition, so it's a short window of time, but I think we're

moving pretty well. Got it. All right. Thank you.

Thank you. Our next question is from David Larson with BTIG. Please proceed with your question.

Hi. Can you talk a little bit more about the software revenue growth on a -over-year basis? I think I heard you say it was down 6% -over-year organically. Is that correct? And how did that compare to your own internal expectations? And what was that internal growth rate or organic growth rate for the year, please? Thanks very much.

Yeah, Will, can you just remind us of the specific growth rates on the software side as I flip through mine, making sure I get it right? I mean, the growth rate was down in the fourth quarter, but up 12% for the year, 9% organically, right?

Yeah. I mean, total revenue

for the year,

yeah.

So, yeah, fourth quarter revenues were down on the software side. And really, the challenge there was twofold. One, we did have a couple of renewal slippages after past August 31st into the first quarter. But our real challenge has been in the Asian market. It's not a new issue. It's one that's really been in flux since COVID, quite frankly. And a particular focus for us as we move into fiscal year 25, we've been overgrowing, if you will, in our North America and European markets and compensating for that. But it's an area for improvement for us going forward.

OK, and I think I see the software gross margin of around 72% in the fourth quarter. It's usually in the 90% range. So should we think about that as being like an unusual quarter because of some renewal timing? And you'll get back up to that 90% range in one queue of next year. So should we see that organic software revenue growth pop back up, starting in fiscal year?

Yeah, our software revenue margin is impacted. I don't know that it went all the way down into the 70s. I think it was in the mid-80s. And so some impact there, as we indicated earlier, that the software side of the proficiency business is down towards 80-ish percent compared to our 90-plus percent in terms of our existing software, our legacy software products. So some impact there. And the proficiency overall profitability, both in terms of software, as I've just described, and on the service side. You know, we see means for improving those as we move through the course of the year. We improved it tremendously through the acquisition in terms of rationalizing some of the overhead expenses of that business unit. It starts in the fourth quarter, in the start of fiscal year 25, with a profitability profile that on a percentage basis is a little less than our legacy model, if you will. The overall company EBITDA guidance of 31% to 33%, underlying that on the legacy side SLP, probably could have been up towards that goal that we set for ourselves, so 35% to 40%. But proficiency impacts that in 25%. We believe we, in the longer term, in the 26%, will get them in line with our profitability profile. But that'll continue to improve to get to that level through the course of 2025. So on the software side, specifically back to your question, you have some impact from proficiency there. I think we'll gradually see some improvement as we go quarter to quarter through 25.

Great, one more quick one. I think the service gross margin you reported, am I seeing this correctly, minus 4% in fiscal 4Q? And I'm assuming that that's from proficiency. And it's my understanding that proficiency is very much tied to like the clinical trial activity, basically training the folks at the site on how to basically implement the clinical trial that's in line with basically the trial master file. So can you maybe just talk about perhaps, I don't know, the mix of clinical trials that you're supporting for example, if there's more obesity health related clinical trials, if you're seeing a slowdown in like perhaps gene therapies, because the funding environment I would think would be very good, just any more color there. And I think you hired a couple of scientists last quarter. Are they being, like, are they selling? Just any more color on that, the expected lift to that service gross margin, thank you.

Yeah, no, two-part answer. You know, I'll talk to the proficiency side of your question and then Will, maybe you can talk to the fourth quarter margin with some reclass issues there. Proficiency in terms of, yeah, supportive clinical trial activity on the simulation side is its primary focus, business driver, if you will. No specialty in terms of singular therapeutic areas. Their portfolio of past projects spans, most all therapeutic areas tend to be more valued in difficult, complex clinical trial protocols where obviously a more aggressive, comprehensive training ahead of its initiation benefits protocol experience more significantly. But there's no therapeutic area sort of concentration in terms of their portfolio of activities. Will, you wanna talk about the margin?

Sure,

and I can answer this for the software and the services. So Q4 certainly has some true ups that we do when we look at that on an annual basis and we go through the audit process. 72% in mention for software for the quarter in Q4. That was primarily due to just the immunotrix software impact coming in a bit lighter, but as Sean mentioned, the mid 80s are where we would expect to see that going forward. Used to be in the 85 to 90 range and we mentioned there'd be some decline there. On the services side for Q4, we did look through the year. I think I mentioned it during the call. There was an adjustment that we made. It was about two and a half million dollars. Looking through the year for international efforts that we have with employees and services group. They're all worked through a professional employer organization or a PEO. We reclass those from GNA expense for the year into services. We did that in Q4 so that again, looking forward, the total year 30% services margin as we continue going forward and leveraging the proficiency business in our business, looking for upsides with billable utilization focus, that 30 to 40% range is where we'd be targeting.

Thanks very much, appreciate it.

Thank you. Our next question is from Scott Showenhouse with KeyBank Capital Markets. Please proceed with your question.

Hey team, thanks for taking my question. I wanted to touch on the 10 to 15% organic growth outline for next year. As we sit here today, you said your guidance contemplates levels from what we're seeing to here today, which is clearly depressed. You had the same kind of organic revenue guidance last year. So maybe walk us through what's expected or built into the low end of that range and the top end of that range. And maybe specifically also on where you think the biotech end market is expected to be for next year.

Yeah, hey, we're all trying to throw that dart and read the tea leaves in terms of are we moving forward? And we certainly see some positive things. I saw the Perma CEO spoke very positively today of market opportunity into 2025. And we see a lot of positive too, our discussions of weight in terms of our clients' budgetary processes. That's a phenomena of our industry in which we've got a few dollars left to spend this year. We lose it if we don't spend it by the end of the calendar year. Now some great discussions taking place right now. And I wanna be optimistic, but I'm also cautious. We've seen upticks in funding that have been short lived and pulled back. And therefore, our approach here in terms of guidance for 25 is pretty, is conservatively set based upon, okay, the market as it is today. The range of 10 to 15% organic growth. Hey, we came in higher end of that range this year. I've got confidence in our organization. We've executed well in a challenging market over the last two year window of time and would be confident in terms of our ability to perform at the high end of that range. But guidance being what it is, we'll take a conservative approach and carry forward our 10 to 15% from last year. But boys, if current market conditions do, run on the uptick and start to improve this fourth quarter of the calendar year or into 25, that we should be able to support and grow with that growth as well into next year. But certainly at this point in time, I've proven that we take a conservative approach to setting our guidance

for next year. Thanks, Sean. So I'm assuming you're meaning that you have very little assumptions of a return or reacceleration on the biotech end market, given all that commentary, is that fair?

You know, I have hope for, but from a guidance sort of perspective, let's see it start to accrue before we

count on it happening. And then as a follow up, I think you mentioned in your prepared remarks, Sean, that you saw some slippage in renewals on the Gastro Plus. Can you provide maybe more color on that contract? Was it a large pharma? You know, what was the decision there to not renew or the push out of the renewal? Can you just give us more color on what happened there on the Gastro Plus side?

Yeah, you know, the push out, it's not a non-renewal decision. It's get the paperwork through and get the documentation, purchase order, and I'll get that all done by August 31st, our funky fiscal year here. August, a lot of people are on vacation in August, and it's not an excuse, but it sometimes is often difficult to get things closed.

I mean, the only

challengeable one in the mix there is that in the fourth quarter, we did have a renewal situation where we had a specific client that acquired a second company during the course of the year. And in fact, then as well closed one of their sites. And so that was a situation where we had three renewals come up, the original company, the acquired company, and within that original company, their license configuration was site-based. And so in that situation, which is, you look back over our history in terms of that differential between that 90 renewal rates on software and 100%, what is that difference? I mean, it's either companies going bankrupt and departing the landscape or consolidation. And so we had one of those in the fourth quarter results. The slippage ones are timing and aren't takeaways of our business, if you will. It's only those acquisition scenarios that can be troublesome.

Thanks for all that color, really appreciate it. Thank you. Our next question

is from Francois Brisbois with Oppenheimer and Company. Please proceed with your question.

All right, thanks for taking the question. Just two here. I was just wondering if you can give us a little more explanation or color around that TAM doubling that you talk about. It's not necessarily a bio-stimulation play, but with proficiency here, how do you get to a doubling of the TAM and then I know you're still getting this acquisition integrated, but any other color on more M&A or is it just one step at a time? This was a big acquisition. Let's get this one figured out for the time being. Thank you. Sure,

Frank. Yeah, I mean, the TAM increment with proficiency, the incremental four billion, is pretty evenly split between the two markets. Our assessment of what is the market for the training activity and clinical trial space, an estimate of what is spent in that area across clinical trials, all phases, all therapies, et cetera, for specifically the training aspect of a clinical trial. And on the Medcom side, their marketplace is twofold. It's more predominant in the regulatory process, pre-approval process, and in part is well-sourced in medical communications agency work that's done post-approval in the commercialization process for a new drug market entry. The business is skewed a little bit towards the regulatory process, and so therefore we've calculated that TAM in that same disproportionate towards the regulatory market activity there. Acquisitions are a continuous process in terms of working in the landscape and following companies that are on your radar and adding and deleting those that come and go. We've certainly devoted resources to the integration process of our most recent acquisition, but our strategy is unchanged in terms of supplementing organic growth with acquisitions. I'd say we're going to take a little bit of a breath in terms of the vigor there, but it is not on the shelf and not active at any point in time. And should an opportunity arise that fits our criteria there, we'll certainly regard it at that opportunity. We will continue to do acquisitions. We've gone from a, you know, we used to get questioned, when are you going to do the next acquisition? Because you haven't done one. We've done one in each of the last two years. Our cadence is, I think, good there. No guidance that we'll do one in 2025, but certainly the underlying activity that could lead to that is

active. Thank you.

Thank

you. Our

next question is from Constantine Davids with Citizens JMP. Please proceed with your question.

Thanks, Sean. This, correct me if I'm wrong, this is the type of time of year you typically would look to flex price. I'm just wondering how that would look, you know, going forward in terms of how much price you would look to increase and how would that compare to last year? Yeah,

it is sort of our, you know, adjust the price list timeframe of the year. And, you know, our approach this year round was somewhat similar to last year. Its outcome was similar to last year. Historically, that price increase can be, you know, 5% plus sort of level. Typically, you don't want to be on yielding 100% of that. Large clients or in particular market segments, you're looking to discount to gain footholds. You know, two years ago, not last year, not Fiscal Year 23, but Fiscal Year 22, we were a little bit more aggressive. It was the start and I'll call it peak of inflationary macro environment and whatnot. It came back down in Fiscal Year 24 and has ranged to Fiscal Year 25. You know, relatively comparable to last year.

Great, thanks. And then I guess just one follow up on operating expenses. For the past few years, sales and R&D growth has kind of occurred at a clip that exceeds sales growth. Are you going to start to see a little bit more leverage in Fiscal Year 25 on those line items?

Yeah, you know, true, we've invested in sales and marketing and R&D. Keep in mind that this past year, the reclass were initiated at the beginning in the first quarter, the beginning of the year, and reclassing costs out of G&A, into gross margins, some of that's gone into sales and marketing and R&D, overhead costs with all of the people that are working in those line items, if you will. But certainly incremental to that, we've made investments that I think are paying off. When I look to the execution and success we've had in double digit growth and stepping up our growth in Fiscal Year 24, that in good part is due to those business development resources that we've built. And it gives us the confidence when we make an acquisition, like a proficiency acquisition that we have the infrastructure on the business development side to leverage those products and services, new products and services going forward. So, you know, we will get more leverage, but I think we are already getting the leverage out of the business development side. And on the R&D side, hey, a great year with delivery of significant releases across all areas of our software platform that has been delivered by that R&D group, which is supplemented with the benefit of, you know, some tight collaborations with large pharma clients as well as the regulatory environment. You may have noted that there was a recent FDA, yet another FDA grant collaboration that we're engaged in. So, you know, overall, I think we made some investments there in R&D and sales and marketing. I think we're getting the benefit of it and that benefit will accrue going forward. That said, overall, we're particularly focused in terms of getting the business back to historical profitability levels, that 35% plus adjusted EBITDA level. And I feel good in programs that we've initiated that will move us into that direction in 25. And I think we'll, you know, have the potential to accrue benefit beyond

that as well. That makes sense. Thanks, Sean.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr. Sean O'Connor.

Thanks.

Thanks again, everyone, for joining our call today and your interest in SLP. I'll note as well for those in terms of querying on market conditions and whatnot, we are wrapping up our participation in two of the most significant conferences in our, at least on the biosimulation side. One is wrapping up today and another occurs in a couple of weeks, the AAPS FarmSide 360 conference and the ACOP conference next month. Two significant conferences for us and look forward to the activity that that generates. Also on the horizon are conference attendance by myself at the Stevens conference and the BTI Investor Conference, virtual conference, I believe it is next month. And I hope to see many of you there. With that, we'll close off the call. And again, thanks. Thanks for joining us today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.