Simulations Plus, Inc.

Good afternoon, everyone. Welcome to the Simulations Plus second quarter 2025 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 have 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, 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. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. please refer to the reconciliation tables and the accompanying materials for additional information. With that, I'll turn the call over to Sean O'Connor. Please go ahead.

Sean O' Thank you, Lisa. Good afternoon, everyone, and thank you for joining our second quarter fiscal 2025 conference call. The momentum we reported at the beginning of 2025 continued into the second quarter. We're pleased to report that total revenue increased 23 percent year over year and 5% on an organic basis, excluding the contribution from our adaptive learning and insights and medical communication business units. Diluted EPS was 15 cents, adjusted diluted EPS was 31 cents, and adjusted EBITDA was 6.6 million, or 29% of revenue. Turning to the macro environment, our operating environment remained unchanged from last quarter, And in line with recent trends, our customers are still taking a cautious, cost-conscious approach to spending. In our software business, which provides biosimulation infrastructure to our customers, we're seeing continued steady growth as it plays a critical role in our customers' expanding use of biosimulation to improve their development efforts. While services spending picked up since the start of the year, and we enjoyed a second consecutive quarter of robust bookings, clients have remained slow to initiate project starts. We have received several investor inquiries on potential impacts from recent federal cost-cutting measures under the new administration. We see minimal risk related to national institutes of health and other academic funding sources. While we have leveraged NIH grants for certain R&D projects in the past, we have no current exposure to NIH. Additionally, our software is provided free of charge to academic institutions, so we have no revenue risk associated with potential federal funding reductions. As we have consistently stated, our highly disciplined approach to executing effectively in challenging environments is a key operating strategy that has served us well over the past two years. At the same time, we're prepared to capitalize on any increase in customer spending as conditions evolve. Turning to our software segment, our software performance was impressive with strong growth. Renewal rates remain at historical levels, and new logo sales are tracking well, even with the funding challenges some of the smaller biotechs are facing. Software revenue grew 16% in the second quarter of 25, 8% on an organic growth basis, excluding the $1 million in revenue from the Alley and MC business units. Our quantitative systems pharmacology, or QSP, business unit led software growth this quarter. Its revenue surged by 89%, largely driven by a model license for atopic dermatitis. As a reminder, QSP's quarterly results can be lumpy based on the high ticket price per license and a smaller pool of end users. Our chem informatics or chem business unit software revenue grew by 8% driven by higher revenues from AdMet Predictor. Additionally, there were 10 new customers and seven upsells to existing customers during the quarter. In our clinical pharmacology and pharmacometrics or CPP business unit, revenues grew 9% and we added 11 new customers and had two customer upsells during the quarter. Our physiologically-based pharmacokinetics, or PBPK, software revenue grew 1%. In the second quarter, we had some renewal slippage for GastroPlus. However, these deferred renewals have already closed in the third quarter. GastroPlus added seven new customers and booked seven upsells with existing customers. Software revenue in our Alley business unit 0.9 million, and software revenue in our MC business unit was 0.1 million. Overall, software revenue for these two new business units was in line with expectations. Moving to our services segment, services revenue grew by 34% in the second quarter, yet was flat on an organic basis. While bookings in our services segment continue to be strong, these clients continue to pace project initiation out to the second half of the year. This will result in a push of some service revenue to the back half of our fiscal year. Services revenue was led by strong performance in our CPP MC business units. CPP services revenue increased 19%. MC services revenue was $2.3 million. Our PVPK services revenue decreased 23%, reflecting the cautious pace of project initiation as previously mentioned. And our QSP services revenue decreased 7%. Services bookings during the second quarter were very strong, especially in our CPP and MC business units. And we ended the quarter with a backlog of 20.4 million, up 18% compared to the first quarter, and up 13% year over year. With that, I'll turn the call over to Will.

Thank you, Sean. To recap our second quarter performance, total revenue increased 23% to $22.4 million, including a $3.3 million contribution from the ALI and MC business units. Software revenue increased 16%, representing 60% of total revenue, and services revenue increased 34%, representing 40% of total revenue. Turning to the software revenue contribution from our products for the quarter, GastroPlus was 46%, Monolix Suite was 23%, AdMet Predictor was 17%, Proficiency was 7%, and other products were 7%. For the trailing 12 months, GastroPlus was 48%, Monolix Suite was 20%, AdMet Predictor was 17%, Proficiency was 7%, and other products were 8%. The trailing 12-month software revenue for the ALI and MCBiz products only includes revenue since the acquisition of Proficiency in June 2024. With the Proficiency short-form merger into Simulations Plus completed in January, we also rebranded the ALI training platform to Proficiency to leverage the name recognition with our customers. During the quarter, our software customer renewal rate was 90% based on fees and 84% based on accounts. The renewal rate based on accounts was in line with the prior year and the decline in renewal rates based on fees was primarily due to one large customer renewal that did not close until the third quarter. Given the size of that renewal, there was a more significant impact on the fee-based renewal rate than on the account-based renewal rate. Note that renewals which are recovered in a future quarter are not included within the calculation of our published renewal rates in the future quarter. Average software revenue per customer for the quarter increased to $124,000 from $113,000 last year. On a trailing 12-month basis, our software customer renewal rate was 91% based on fees, and 83% based on accounts, both generally in line with prior period trends. Average revenue per customer increased to $101,000 from $95,000 on a trailing 12-month basis. Shifting to our services revenue contribution by business unit for the quarter, CPP was 39%, MC was 25%, QSP was 19%, and PPPK was 17%. On a trailing 12-month basis, CPP was 40%, QSP was 26%, PBPK was 18%, and MC was 16%. Again, the trailing 12-month services revenue for the MC business unit only includes revenue since the acquisition of proficiency last June. Total services projects worked on during the quarter were 203, and year-end backlog increased 18%. to $20.4 million from $17.3 million last quarter. The largest driver of the backlog growth quarter over quarter was in the CPP and MC business units. Total gross margin for the quarter was 59%, with software gross margin of 81%, and services gross margin of 25%. On a comparative basis, total gross margin for the prior year quarter was 72%, with software gross margin of 88% and services gross margin of 44%. The decrease in total gross margin was due to a $4.2 million increase in cost of revenues. The increase in software cost of revenues was primarily due to a $1.2 million increase in software-related costs, including $0.8 million of amortization related to the proficiency acquisition, and $0.4 million higher amortization of capitalized software costs. The increase in services cost of revenues was primarily due to a $3 million increase in service-related costs for the acquired MC business unit and the reclassification of expenses from G&A expense to cost of revenues in connection with the prior year business unit reorganization. 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 17% of revenue compared to 11% last year. G&A expense was 20% of revenue compared to 30% last year. And total operating expenses were 46% of revenue compared to 48% last year. Income tax expense for the quarter was $0.4 million compared to $1.2 million last year. and our effective tax rate was 12% compared to 23% last year. The lower effective tax rate was primarily driven by the tax benefit associated with disqualifying dispositions during the quarter. We now expect our effective tax rate for the fiscal year to be in the range of 21 to 23%. Net income for the quarter was $3.1 million, or 14% of revenue, compared to $4 million or 22% of revenue last year and diluted EPS was 15 cents compared to 20 cents last year. Adjusted EBITDA for the quarter was $6.6 million or 29% of revenue compared to $7.1 million or 39% of revenue last year and adjusted diluted EPS was 31 cents compared to 32 cents last year. The reconciliation of non-GAAP financial metrics to the relevant GAAP metrics is in our earnings release and on our website. Turning to our balance sheet, we ended the quarter with $21.4 million in cash and short-term 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.