Good day, and thank you for standing by. Welcome to Certara's First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Deuchler.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have William Feehery, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information, which you can find on the company's Investor Relations website. In their remarks and 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 recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I'll turn the call over to William.

Thank you, David. Good afternoon, everyone. Thank you for joining Certara's first quarter earnings call. John and I will start with prepared remarks, and then we will take your questions. Throughout the first quarter, Certara built upon the solid business momentum observed in the fourth quarter of 2023. We're pleased with our start to the year, delivering total revenue of $96.7 million, representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI-enhanced products continues to grow following the acquisition of Vyasa just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, Certara's products and services remain top of mind. We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R&D initiatives. Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, it will take time for funding to translate into bookings and sales at Certara, and we have not yet seen an inflection point in activity through the first several months of the year. Internally, our focus remains on several key initiatives that will drive Certara's next stage of growth. On our last earnings call, we highlighted the investments we are targeting in 2024 including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities. We are dedicated to unifying our organization, both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, a unifying platform that integrates access to our entire software suite of applications. Certara Cloud will make our software solutions easier to navigate across each user's organization and with external parties, enabling collaboration across different workflows. Certara Cloud already has 1,500 client-specific portals and is currently used by 15 of the top 30 biopharmaceutical companies. Investments like Certara Cloud and other initiatives underway are designed to ease access to the Certara platform, improve data and information security, and deliver enhanced capabilities to customers. I am proud of the work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now turning to the performance of the business. In the first quarter, we delivered software revenue of $39.3 million, representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry-leading Simcyp, Phoenix, and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix hosted, which is a cloud-based version of the product. With cloud computing integrated into Phoenix, customers will have immediate access to upgrades, remote workflow processing, and improved performance and run times. Customer uptake continued to progress nicely, and we are pleased by the feedback we have received to date. Throughout the quarter, our software team also began to accelerate the development of CoAuthor, a regulatory writing tool that uses AI and machine learning to draft regulatory submissions. The next version of CoAuthor will be officially launched at the end of the second quarter, and early versions are used by our internal regulatory writing team on customer projects. Over time, CoAuthor will drive efficiencies across different regulatory writing processes, and we have received significant interest from customers. Our technology-driven services segment delivered revenue of $57.3 million in the first quarter, which was flat year-over-year on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious customer spending in 2023. In the first few months of the year, we have been encouraged by customer discussions across our services group. Certara's ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable, and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements. In conclusion, Certara is in a strong position to grow in 2024, headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for biosimulation while also making our products easier to use. I'm confident in our ability to meet our 2024 goals, and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.

Thank you, William. Hello, everyone. Total revenue for the three months ended March 31, 2024, was $96.7 million, representing year-over-year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39.3 million in the first quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 61% of first quarter software revenues, up from 56% in the prior year period. Software bookings were $33.1 million in the first quarter, which increased 8% from the prior year period. Trailing 12-month software bookings were $139.5 million, up 11% year-over-year. In the first quarter, the software net retention rate was 114%, which is consistent with our long-term growth profile. Now turning to services revenue, which was $57.3 million in the first quarter, flat versus the prior year period on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. Technology-driven services bookings for the first quarter were $72.7 million, which decreased 11% from the prior year period. Trailing 12-month services bookings were $256 million, also down 11% as compared to the prior year. Total cost of revenue for the first quarter of 2024 was $39.3 million, an increase from $34.9 million in the first quarter of 2023, primarily due to a $1.9 million increase in employee-related expenses, a $1.2 million increase in stock-based compensation, and a $0.8 million increase in software amortization. Total operating expenses for the first quarter of 2024 were $58.7 million, an increase from $48 million in the first quarter of 2023. The components of operating expenses are as follows: Sales and marketing expenses were $10.7 million compared to $8 million in the first quarter of '23. This increase is primarily due to a $1.7 million increase in employee-related expenses due to the expansion of the salesforce. R&D expenses were $12 million compared to $9.3 million for the first quarter of 2023. R&D expenses were up primarily due to a $3 million increase in employee-related costs as we grew our team of software developers. G&A expenses were $23 million compared to $19.8 million for the first quarter of 2023. The increase was due to a $1.6 million change in contingent consideration primarily related to the acquisition of Vyasa and a $1.1 million increase in employee-related expenses, partially offset by a $0.9 million decrease in stock-based compensation. Intangible asset amortization was $12.6 million compared to $10.5 million in the first quarter of 2023. Depreciation and amortization expense was $0.4 million, flat with last year. Continuing down the P&L, interest expense was $5.8 million compared to $5.5 million for the first quarter of 2023 due to higher interest on the floating rate portion of our term loan. Miscellaneous income was $1.6 million compared to $0.5 million in the first quarter of 2023, primarily related to the return on our cash invested. Income tax was a benefit of $0.8 million compared to an expense of $1.1 million for the first quarter of 2023. Net loss for the first quarter of 2024 was $4.7 million compared to net income of $1.4 million in the first quarter of 2023. Reported adjusted EBITDA for the first quarter of 2024 was $29.1 million compared to $32.3 million for the first quarter of 2023. Adjusted EBITDA margin was 30% for the first quarter of 2024. Reported adjusted net income for the first quarter of 2024 was $16.5 million compared to $19.3 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was $0.03 compared to earnings per share of $0.01 in the first quarter of 2023. Adjusted diluted earnings per share for the first quarter of 2024 was $0.10 compared to $0.12 for the first quarter of last year. Now moving to the balance sheet. We ended the quarter with $224.8 million of cash and cash equivalents. As of March 31, 2024, we had $287.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows: We expect total revenue in the range of $385 million to $400 million, representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar figure basis in 2024 and expect adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of $0.41 to $0.46 per share, fully diluted shares in the range of $160 million to $162 million, and the tax rate in the range of 25% to 30%.

Thank you, John. To summarize our message today, we are pleased with our first quarter results, and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology. We will now open the line for questions. Operator, can you open the line.

Our first question comes from David Windley at Jefferies.

I wanted to start with a question about the cloud launch. Bill, I believe you mentioned that you have established around 1,500 client portals in 15 of the top 30 biopharma companies. Could you provide a bit more detail on that? Also, since you referenced those top biopharma companies, I'm curious if the adoption is more prevalent among your larger clients, smaller ones, or if it's evenly distributed. Essentially, how is the adoption progressing, and how does it align with your expectations?

Thank you for the question. The Certara Cloud represents a significant advancement in our transition to a comprehensive platform for our suite of software products. We are establishing this cloud as the primary access point for our upcoming product launches. We currently have a good number of customers utilizing it, and we expect that to grow as new product releases will primarily be accessible through the cloud. Initially, we have started with smaller clients to ensure everything functions smoothly, and now we are moving towards larger clients. We anticipate this will pick up speed as we progress through the year. We are enthusiastic about this development for several reasons. It allows for the reuse of software modules across our platform, enabling us to create them once and apply best-in-class functionality to all our products. Additionally, it helps standardize the appearance of our products, facilitating easier data sharing amongst them. This could also provide marketing benefits, as companies can see the products they currently use and potential ones they could adopt, allowing for productive discussions. Overall, we view this as the next step in the evolution of our software, and we've seen positive initial adoption from our clients.

As a follow-up to that, I believe you've regularly versioned Simcyp every year and I believe that versioning drives economics for you. You add capabilities and maybe get a little bit more, if nothing else, inflationary price. Are those types of economics going to be the same in the cloud-hosted products? Or will that change?

Yes. We launch a new version of Simcyp every year, and for Phoenix, we are transitioning to a 6-month release cycle. This approach offers economic benefits, as each version includes additional features that encourage upgrades. However, with the 6-month cycle, not all customers may choose to upgrade every half year, but there will likely be growing pressure to do so. In terms of economics, when we had desktop installations, many customers faced costly software validation processes, which are becoming less burdensome with our shift to the cloud. This allows us to handle much of the work ourselves and share it with our customers, which we hope will lead to more frequent updates.

Got it. And if I could just ask one more on your guidance on the revenue. I believe, at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically, a little less than half inorganically. I wondered if you could confirm that that's still your thinking? And could you break out the organic versus inorganic contribution in the first quarter? That would be it for me.

Yes, David. So on the quarter, we put up 7% revenue growth. And as we said when we first put out the guidance, we're still confident in that guidance. But when we first put that out, we said that on the services side, there'd be a bit of a first half/second half story or a ramp into the later part of the year related to that part of the business, so we still anticipate that to be the case. Q1 came in line with our expectations. On an organic basis, the deals contributed a few hundred basis points to the growth on the quarter.

Our next question comes from Jeff Garro at Stephens.

Maybe a couple for me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I wanted to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start.

Yes, we did experience some timing issues with bookings, particularly on the software side rather than the services side. Some large Pinnacle deals that were originally scheduled for March were pushed to April, but those have since come in, and we have no concerns. On the services side, however, it's a tougher comparison, especially for Tier 1s, as we had a very large Q1 in 2023. The other tiers are still recovering, and our recovery remains on track. Q1 services bookings are in line with our expectations in terms of dollar value. The tough comparison is affecting the growth rate, but from a dollar perspective, everything is progressing as anticipated, while Tier 2 and Tier 3 are still not back to their historical levels.

I appreciate the granularity there on customer segmentation. Maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth. How should we think about services bookings or backlog converting to revenue for the fiscal year? It looked like nice execution on that front here in the first quarter. Should we expect more sequential improvement from here? Or does the first quarter represent kind of the right velocity of conversion for looking at things from, say, a trailing 12-month services bookings to revenue conversion perspective?

Right. Yes. So, I mean, as far as conversion, we're pleased with the conversion. It's on our expectations. So backlog, I'd say there's not an unusual amount of backlog conversion, but it is playing out as we thought it would, meaning we have some bookings left over from last year. We're converting those, and the revenue plan played out as we anticipated. As you look forward on bookings, we are excited about what we're seeing. And as Bill mentioned in the prepared remarks, we're excited about the biotech funding environment and the fact that some of our customers or potential customers are getting funded. But it's really important to note that we haven't reached the inflection point. We don't see that in the bookings in Q1. We don't see it in the bookings, to-date in Q2. And so if that's going to play out for us, it's definitely going to be more in the back half of the year, and we haven't seen it yet.

Our next question comes from Luke Sergott at Barclays.

I wanted to follow up on the M&A and get more specifics about the contributions to each segment this quarter. Additionally, as David mentioned, could you clarify any changes to the guidance for the year?

No. The guidance, no changes there. We're confident in the range that we have, and Q1 played out in line with our expectations. The M&A contribution, when you look at bookings, is less than 2% of bookings related to M&A, so it's really not a material amount. As I mentioned earlier, when you look at our 7% reported revenue growth, there was a contribution of a few hundred basis points. But we haven't split that out on a software services basis.

Okay. As we consider the guidance, I understand the catch-up between the first and second half. However, regarding the services segment, the regulatory business has been weaker for some time. You mentioned softer bookings in the first quarter. I'm trying to understand what visibility you have on the services side and whether this accounts for the anticipated recovery in the second half.

Well, I mean, a key aspect of that is we put together the guidance with the notion of stability, which is what we saw play out on the quarter, and it was what we saw in the bookings results for the second half of last year. To get to the higher end of the range, we would need to see that inflection point due to any biotech funding that might be out there. We are targeting those companies that are gaining funding in those capital markets. But again, any activities are really going to be in the second half of the year. Services, so the regulatory business, as well as our biosimulation services, especially in the Tier 2 and Tier 3 customer categories, continue to be impacted by the same dynamics that we saw last year. Do we see stability? We do. We're happy about that. We don't see continued decline, but we also don't see acceleration and haven't hit that inflection point yet.

Our next question comes from Michael Ryskin at BofA.

Great. I want to go back to the bookings in the quarter. I know you called out, a couple of times, the strong or the elevated comp in services bookings. I mean, I think it's elevated on a dollars basis. But on a percent basis, it was only up 4% last year. So just trying to parse out a little bit on is the seasonality on that expect to be a little bit different? Or put another way, if I look at services bookings, last year, it's $82 million in 1Q and then $50 million, $57 million, $75 million the rest of the year. So sort of a big step down and then ramping in through the rest of the year. Are you expecting a little bit of a more spread out seasonality there? I know it's tough to talk about bookings ahead of time, but just trying to reconcile the trailing 12-month bookings growth and the 1.1 book-to-bill with, like you said, some expectations with pretty steady revenue growth this year.

Yes, Mike. Typically, we observe that Q2 tends to be lower than Q1. So, in line with your observation regarding seasonality, we believe that given the current state of the end market has not changed significantly, there is no reason to anticipate a departure from the usual seasonal patterns we’ve experienced. This serves as the best indication we can provide.

No, I was going to say, just to clarify, yes, there's usually a step down, but last year, there was a very sharp step down from $82 million to $50 million. I think this year, is it safe to say that you expect less of a step down and that last year, 1Q was just elevated in dollar terms? I'm just trying to think about services bookings…

Yes. The answer to that is yes. The step down last year was unusual. From that point forward, we saw some recovery and stability. Even though we do anticipate some level of seasonality, what I would say happened last year, was an unusually large step-down. And sitting here in May, we don't anticipate that we'd see that level again because, once we step down, we started to see recovery into Q3, then some acceleration into Q4, and now Q1 of 2024 has played out in line with our expectations. The other thing to add to that is, really, if you look at the years before 2023, if you look at 2021 or 2022, that's what we would point to as more sort of typical seasonality.

Okay. All right. Fair enough. And then, I guess, sort of the second part of that question would be on the book-to-bill, using the trailing 12 months, I think it's 1.1 this quarter. For most of the last year, it was in sort of like the 1.15. And then prior years, it was more of 1.18 or 1.2. Just a little bit lower than it's been in prior years. Is that just sort of catching up to the softer bookings you saw last year? I mean is it fair to say that you expect that to reaccelerate back into the 1.2 range as we exit the year?

Yes, we do expect acceleration over time, but we need to see some recovery in customer end market behavior. We finished the year at 1.1, and in Q3 of last year, we were also at 1.1. We continue to be at 1.1, indicating that we haven't yet observed an inflection point in the end market customers.

So Michael, I think you're talking about software a little bit. So in Q1, our software bookings were a little less than we expected because we had some bookings move in April. We did actually get those, so we're feeling pretty confident that the bookings are appropriate for what we're giving you in our outlook.

Our next question comes from Max Smock at William Blair.

I wanted to follow up on Luke's question earlier about inorganic bookings. And I might have misheard, but I think you said in total, inorganic bookings are around 2% of total bookings, which implies something about $2 million in total for the quarter here. Coming into this year, you talked about those two recently acquired businesses contributing mid-single digits to growth, which I think implies, based on our model, around $18 million in revenue in 2024 in total. So I guess my follow-up would be, was it $2 million in bookings from the recent acquisitions in line with your expectations? And then given that small bookings number, are you still as confident in that mid-single-digit organic contribution in 2024 as you were earlier this year?

Max, yes. So we are. The first quarter did play out as we expected it to. So not a huge contribution in bookings from the acquired companies from the Q4 closure of the deal. We'd expect that to accelerate as we move through the year. So I'd say that Q1 played out as we thought. And we're still confident in the guidance message that we gave with both the reported and organic ranges.

Understood. And then maybe one on budget flush here. So last year, you had some clients that came to you that had to necessarily cut their budget but hadn't spent their budget either, so you had some benefit there at the end of the year. Just wondering, based on your conversations so far this year, it sounds like things are getting better, but not necessarily translating into orders. How do you think about the potential for that budget flush to occur at the very end of this year, similar to what you saw last year? And what would that mean for your results relative to the 2024 guide that you've reiterated today?

Well, in our guide, we did anticipate some seasonality. I think that part of that seasonality is the budget flush dynamic, which typically makes our Q4 stronger on bookings than the other quarters of the year. I'd tell you that as we put together our plan, we did anticipate that that would be the case. We saw that be the case in Q4 of last year, as we did in years prior.

Our next question comes from Steven Dechert at KeyBanc.

With the nice increase in software revenues in the first quarter, was there a certain reason you didn't see more of an expansion in your margins given software is your higher-margin business? And then can you provide more color on the strength you're seeing in your software bookings and revenues?

Yes, we're pleased that software growth in the quarter was 19% and the net retention ratio was 114%. The software team's continued execution has been encouraging. As we ended last year, we were positioned well, and that momentum carried into Q1. Regarding margins for the quarter, we achieved a 30.2% adjusted EBITDA margin. Although this margin was below our full-year guidance range of 31% to 33%, it was affected by about 200 basis points due to the newly acquired companies that we finalized in Q4, including one in December. As we navigate through that, we anticipate some margin improvement. The software performance for the quarter aligned with typical margins, although it was slightly offset by some of the factors I mentioned.

Our next question comes from Cal Cruz at UBS.

Maybe if we could dive a little bit more into the margins. It sounded like a lot of the increase in cost was also associated with additional employee expenses. So maybe if you could provide more detail on how we should think about margins playing out throughout the rest of the year, keeping in mind the impact of acquisitions and hiring.

Full year margin guidance is projected at 31% to 33%. For the quarter, we achieved a 30.2% adjusted EBITDA margin, which falls below the annual range mainly due to two factors. First, expenses have increased, and I will address that shortly. Second, we are still in the process of integrating the deals closed in Q4, which has slightly pressured our margin in Q1. We expect this pressure to ease as we complete the integrations. Regarding investments and cost increases, they are indeed investments. We have detailed our plan to invest in the business throughout 2024 and are actively implementing that strategy. This plan focuses on two key areas: boosting sales and marketing by expanding our sales team, and increasing our R&D capabilities by adding software developers to enhance our software programs, including integrating AI across our offerings. These investments are evident this quarter and will continue throughout the year. As for margin progression, we expect revenue to increase in the second half of the year compared to the first half, which has been a consistent trend in previous years. This anticipated growth will support margin improvement as we finalize the integration of the new deals.

As the team, Constantine Davides at Citizens JMP.

I just wanted to double-click quickly into the funding backdrop. We saw a pretty significant spike in the first quarter funding activity. I'm just wondering, are you surprised you aren't seeing that inflection yet? Or is this, I guess, relative to prior cycles, you've experienced fairly normal in terms of what you think the timing will be between when funding picks up and when it might translate into bookings?

Yes. Thanks for the question. No, we didn't expect to see an immediate increase in bookings from funding. It really started just from what we read, it kind of started in February and moved into March. We think it typically takes several months before that will start to get through to us, which is why we've indicated that we're a little bit more optimistic for the second half than the first half.

But to be clear, too, any tailwinds related to the funding environment are not included in the guidance. We guided from a stability standpoint for the year.

Got it. I have a follow-up regarding the investments. Can you provide an update on the sales force, including its current status and your plans for scaling this year? I'm also interested in the changes made last year to structure and organize the sales force. What early results have you seen from those adjustments, such as win rates, attach rates, or any other relevant metrics?

Last year, we restructured our commercial organization to enable us to sell a broader range of Certara products to customers who typically purchase multiple items. This approach is more effective in reaching them. We anticipated an increase in cross-selling, meaning more customers would buy a wider selection of our products, and we expected to improve our efficiency over time. In particular, in services, we had been using a seller-doer model that involved assigning costly technical personnel to sales, diverting them from billable work. We are pleased with the progress we've made, but there is still more to accomplish. We are somewhat ahead on the software side since we initiated that earlier. We've also trained the sales team extensively on the full range of Certara's offerings. Significant efforts have been made to optimize our sales territories and assign key accounts to the right salespeople. We began to see some positive results from this in the first quarter, but we are not yet operating at full capacity. As we continue to strengthen the team throughout the year, we will likely see further benefits.

Our next question comes from Vikram Purohit at Morgan Stanley.

We have one question for Vikram. Now that the first quarter is behind you, what do you believe will influence the revenue and EPS guidance for 2024?

The guidance for the year remains unchanged. The first quarter aligned with our expectations and plan. Our previous guidance indicated a reported revenue growth of 9% to 13% on an organic basis, with mid-single digits remaining consistent. Additionally, we are dedicated to increasing EBITDA dollars over the year, and our margin is projected to land within the 31% to 33% range, so there have been no significant changes. To reach the lower end of our guidance, we would need to see some market deterioration, which is not currently happening. We noted stability in the third and fourth quarters of last year and that has persisted into the first quarter of 2024. To achieve the upper end of our range, we would require an acceleration in performance; however, this has not been factored into our guidance regarding any potential benefits from the biotech funding environment. Should we experience positive developments in that area, it could help us reach the higher end of our target. Furthermore, if the acceleration continues, the software performance has been strong, and we are optimistic about it. Continued acceleration from our numerous new software offerings would also contribute to moving us closer to the higher end of the range.

I am showing no further questions at this time. I would now like to turn it back to Bill for closing remarks.

Thank you, everybody, for joining us tonight. As we said, we remain very optimistic for the rest of the year. We had a lot of good things happen in the quarter, and we look forward to reporting at the end of this quarter at the same time, same place. Thanks.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.