Certara, Inc. Q4 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Certara Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler of Investor Relations. Please go ahead.

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 full year ended December 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 the 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, February 26, 2025. 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 will turn the call over to William.

Thank you, David. Good afternoon, everyone. Thank you for joining Certara's fourth quarter and full year 2024 earnings call. John and I will begin with prepared remarks, and then we will take your questions. We were pleased to finish the year with strong commercial execution across both software and services, as we deliver financial results consistent with the expectations we outlined in November. We finished 2024 with revenue of $385.1 million, representing 9% reported growth versus 2023. The Certara's fourth quarter bookings of $144.5 million represented 22% growth versus the prior year, driven by software bookings growth of 38% and services of 12%. During the fourth quarter, we saw a healthy software and biosimulation services bookings performance from our Tier 1 and Tier 3 customers, as drug developers around the world continue to use biosimulation to optimize their development processes. Additionally, our regulatory services business had a good quarter, delivering solid bookings, which represented a return to growth. We are encouraged by our strong finish to the year and are now squarely focused on executing our 2025 goals. At Certara, we are enabling Model-Informed Drug Development, or MIDD, in the global biopharmaceutical industry. MIDD is an approach that uses biological and statistical models derived from preclinical and clinical data to inform decision-making in drug discovery, development, and commercialization. Biosimulation is a critical component of MIDD that uses computer-aided mathematical simulation of biological processes and systems to understand the action of a drug in a human body or in a population of humans. MIDD and biosimulation can increase the probability of success in bringing a new drug to market, while also decreasing development costs. We accomplished this through our software platform, which includes four key pillars: our Simcyp-TBPK software, Phoenix PK/PD software, Pinnacle21, which is a data standardization tool, and Chemaxon, our most recent acquisition, which brings chemical property insights to the discovery phase of drug development. In 2024, our customers continued to exhibit cautious spending behavior as they grappled with funding constraints, Medicare drug price negotiations, and geopolitical uncertainty. Our software business continued to grow through the challenging environment, while demand for our services was less predictable, particularly in our regulatory services. Decision-making timelines were and continue to be elongated due to internal discussions at customers. During the fourth quarter, our team executed well despite end market uncertainties, driving software and services bookings that were slightly ahead of our expectations. While we are pleased with our performance, we did not see any change in customer sentiment that suggests to us that our end markets are materially different heading into 2025. As such, our guidance ranges assume that 2025 will be a similar year to 2024 for clinical R&D spending. Now I'd like to take some time to discuss our progress over the past year and our vision for Certara in 2025. Throughout 2024, we took steps to enhance Certara's strategic position as a preferred partner to the global biopharmaceutical industry. In software, we made investments in our R&D infrastructure with three goals in mind: to expand the integration of generative artificial intelligence into existing products; to accelerate the development of new products and product updates; and to begin the process of integrating Certara software into a unified platform. Another focus area was our commercial team, where we added senior-level talent such as key account managers as we seek to strengthen strategic relationships among our top customers. One successful example from this investment was the launch of our CoAuthor regulatory writing product. We began marketing CoAuthor during the second quarter of 2024 and received positive initial feedback from early users. Our regulatory services team also uses CoAuthor to increase efficiency in their regulatory writing projects. We attribute the successful launch to our product development team and a calibrated sales and marketing effort. Beyond internal investments, we focused on successfully integrating Formedix and Applied Biomass or ABM into the organization, and we completed the acquisition of Chemaxon in October of 2024. During the first year under the Certara umbrella, ABM's team seamlessly integrated with the Certara QSP team, leading to a successful 2024, which included a project that was published in Nature of Cancer. Formedix brought complementary software products that were quickly combined with our Pinnacle 21 offering, receiving positive user feedback and bringing additional efficiencies to our customers. More recently, Chemaxon has allowed us to enter the discovery biosimulation market at scale. Chemaxon brings a highly synergistic suite of software products that can be leveraged alongside existing Certara software to bring cutting-edge insights to drug discovery, candidate selection, and lead optimization. We began to see the impact of these investments throughout the year, as we expanded our customer base to over 2,400 life sciences companies as of December 31. Among these customers, we had 431 customers with an annual contract value of more than $100,000 and representing 11% growth over 2023. We also had 67 customers with an annual contract value of more than $1 million, which grew versus 63 customers in 2023. Our growth strategy is working. Despite a turbulent market backdrop, biopharma companies around the world are expanding their use of biosimulation, which can be attributed to the investments and strategic initiatives at Certara. Looking ahead to 2025, there is even more that can be done to best position Certara for future growth. This year, we plan to make further investments in software to accelerate our product development initiatives. Our main priority will be the development of software products for the discovery and lead optimization phase, leveraging Chemaxon's existing capabilities alongside Certara technologies and artificial intelligence. Drug discovery represents a large addressable market for MIDD, whereas Certara's products have historically been focused on the clinical stages. We believe that with our technology we can develop products that will bring predictive analysis and insights into the discovery phase that will be unique and differentiated, with the potential to significantly impact the success rate and associated cost of drug development. In addition to Discovery, we will continue to invest in cutting-edge areas of biosimulation software, including new models and features, QST, and ADMET Property Prediction. Outside of new product development, we will continue to focus on building an integrated software platform by elevating new products to the Certara Cloud. We are confident in our ability to execute our R&D and commercial goals because of our tremendous team. In 2024, we continued to prioritize hiring leading software developers, scientific subject matter experts, and senior commercial talent. We ended the year with over 1,500 employees, including more than 400 with advanced degrees. An example of our team's expertise was the recent inclusion of several extreme colleagues in Stanford/Elsevier's top 2% scientist ranking list. Twelve members of our team were named on the list in 2024, which includes the top and most cited researchers globally. Certara's researchers contributed to over 100 publications during the past year, showcasing the impact of biosimulation strategies and execution on drug development and outlining the different applications of technologies to streamline drug submission and approval processes. I am proud of the accomplishments of our team and I'm looking forward to the continued success in 2025. Before wrapping up, I wanted to provide a brief update on the strategic review of our regulatory writing business. Our internal review process has progressed nicely, and we are continuing to evaluate potential outcomes and their impact on our go-forward strategy. We have not made any decisions and will not be making any further comments regarding the review on this call. We expect to reach a decision in the near term, and we'll plan to share additional details as soon as we have them. In summary, we had solid commercial execution across software and services, driving successful performance in the fourth quarter. Progress Certara has made over the past year was very important as we leverage organic investment and strategic transactions to enhance our competitive positioning. While our end markets remain subdued on a historical basis, the adoption of biosimulation remains strong, which has been exemplified by the performance of our software business and the increasing number of customers using our technology at scale. In 2025, we will continue to invest in software to expand the breadth of our offering. I'm excited to continue to advance biosimulation forward, unlocking greater commercial opportunities and leaving us well positioned for growth in 2025 and beyond. With that, I will hand things over to John to discuss our financial results in more detail.

Thank you, William. Hello, everyone. Before I walk through our financial results and 2025 guidance, I wanted to highlight slide 12 of the accompanying presentation, which provides color on our organic revenue performance in the fourth quarter and for the full year. Total revenue for the 3 months ended December 31, 2024, was $100.4 million, representing year-over-year growth of 14% on a reported basis and on a constant currency basis. For the full year of 2024, total revenue was $385.1 million, representing year-over-year growth of 9% on a reported basis and on a reported basis and 8% on a constant currency basis. Total bookings in the fourth quarter were $144.5 million, which increased 22% from the prior year period on a reported basis. Trailing 12-month bookings were $445.3 million, increasing 11% on a reported basis. Software revenue was $42.3 million in the fourth quarter, which increased 26% over the prior year period on a reported basis and on a constant currency basis. Organic growth in the quarter was driven by biosimulation software and Pinnacle 21. Additionally, Chemaxon contributed $6.6 million to our reported revenue, which came in ahead of our expectations. Ratable and subscription revenue accounted for 63% of fourth quarter software revenues, down from 68% in the prior year period. The decrease in subscription mix was driven by Chemaxon, which has a higher mix of term license software. For the full year, software revenue was $155.7 million, which grew 18% on a reported basis and on a constant currency basis. Ratable and subscription revenue accounted for 65% of full year software revenues, up from 62% in 2023. Software bookings were $59.7 million in the fourth quarter, which increased 38% from the prior year period. Fourth quarter bookings include $11 million of Chemaxon bookings. Trailing 12-month software bookings were $169.7 million, up 24% year-over-year. The software net retention rate was 106% in the quarter and 108% on the year, which is consistent with our long-term growth profile. Looking at our software bookings performance by Tier, we saw a very strong performance in both Tier 1 and Tier 3 customers in the fourth quarter and throughout the full year, driven by continued adoption of our software. Now, turning to services revenue, which was $58.1 million in the fourth quarter, up 7% versus the prior year period on a reported basis and on a constant currency basis. Our services business has continued to recover following a period of cautious spending among our customers. For the full year, services revenue was $229.5 million, which grew 3% on a reported basis and on a constant currency basis. Services revenue in 2024 includes regulatory writing revenue of $54.7 million, which compares to $60.5 million in 2023. Technology-driven services bookings in the fourth quarter were $84.8 million, which increased 12% from the prior year period. Trailing 12-month services bookings were $275.6 million, up 4% as compared to the prior year. In the quarter, we saw double-digit growth in biosimulation services bookings with growth across all three of our biopharma customer tiers. Biosimulation services bookings were strongest in Tier 3, growing in the low 20s. For the full year, biosimulation services bookings grew 13%. Regulatory writing bookings returned to growth in the fourth quarter, up mid-single digits versus the prior year period, driven by solid bookings in Tier 1 that were moderately offset by declines in Tier 2 and 3. For the full year, regulatory bookings declined in the double digits. Total cost of revenue for the fourth quarter of 2024 was $38.3 million, an increase from $34.1 million in the fourth quarter of 2023, primarily due to higher employee-related costs and an increase in capitalized software amortization. Total operating expenses for the fourth quarter of 2024 were $56.1 million, a decrease from $62.4 million in the fourth quarter of 2023, primarily due to a $12.8 million decrease in the change in the fair value of a contingent consideration versus the prior year period, which was offset by higher sales and marketing expense and intangible asset amortization. In 2024, we made investments in research and development to accelerate and expand software development efforts, where we have seen good initial success. As Bill discussed, we plan to continue investing in R&D in 2025 to drive new product development and further integrate our software. We expect growth in G&A and sales and marketing to moderate in 2025. Adjusted EBITDA in the fourth quarter of 2024 was $33.5 million, an increase from $29.6 million in the fourth quarter of 2023. Adjusted EBITDA margin in the quarter was 33%, in line with our expectations. As I discussed last quarter, we reprioritized some of our investments in sales and marketing to better align with our end markets. Alongside cost actions taken earlier in 2024, we delivered adjusted EBITDA of $122.0 million for the full year, representing a margin of 32%. Wrapping up the income statement. Net income for the fourth quarter of 2024 was $6.6 million, compared to a net loss of $12.5 million in the fourth quarter of 2023. Reported adjusted net income in the fourth quarter of 2024 was $24.7 million, compared to $14.3 million for the fourth quarter of 2023. Diluted earnings per share for the fourth quarter of 2024 was $0.04 compared to a loss of $0.08 per share in the fourth quarter of 2023. Adjusted diluted earnings per share for the fourth quarter of 2024 was $0.15, compared to $0.09 for the fourth quarter of last year. Moving to the balance sheet. We finished the quarter with $179.2 million in cash and cash equivalents. As of December 31, 2024, we had $295.4 million outstanding borrowings on our term loan and full availability under our revolving credit facility. Now, I would like to walk you through our guidance methodology for the full year 2025. As Bill discussed previously, guidance assumes that end markets in 2025 will be similar to what we observed in 2024. We are monitoring several developments in our markets, which have factored into our 2025 guidance. As we have discussed previously, throughout 2024, some of our Tier 3 customers were slower to deploy capital than we anticipated, which widened the gap between when a customer received funding and when our commercial team was able to close a deal. Among our Tier 1 customers, we saw varying levels of spending activity based on each company's relative exposure to the IRA and impending patent cliffs, which has resulted in a modest impact for both our Software and Services businesses. Our guidance assumes these trends will continue through the end of this year. Factoring in these assumptions, we expect total revenue in the range of $415 million to $425 million, representing growth of 8% to 10% compared with 2024. We expect Chemaxon to contribute revenue of $23 million to $25 million. We expect adjusted EBITDA margins between 30% and 32%. Similar to our guidance last year, we anticipate a higher EBITDA margin at the lower end of our revenue guidance and a lower EBITDA margin at the higher end of our revenue guidance. This will be driven by discretionary investments in research and development, which will be managed based on our commercial performance as the year progresses. We expect adjusted EPS in the range of $0.42 to $0.46 per share, fully diluted shares of 162 million to 164 million and a tax rate in the range of 25% to 30%. I will now turn the call back over to our CEO, William Feehery, for closing remarks.

Thank you, John. To summarize our message today, we are pleased with the many exciting developments at Certara in the fourth quarter and remain focused on executing our growth and profitability goals in 2025. There's a lot to be excited about at Certara, as we advance biosimulation with our innovative technologies. Operator, can you please open the line for questions?

Certainly. Our first question will be coming from Jeff Garro of Stephens Inc. Your line is open.

Yeah. Good afternoon. Thanks for taking my questions. Maybe start off on the 2025 revenue guidance? And is this kind of the typical question of what gets you to the low-end or the high-end of the range? And maybe further just help us understand the kind of balanced end market view up against a pretty strong Q4 bookings result on several fronts. Thanks.

Hi Jeff, it's John. I'll address the last part first. We're pleased with our fourth quarter results, which we believe is due to the team's execution. Throughout the year, we have been building our commercial team, and we were glad to see their performance in Q4 despite facing challenging end markets. Regarding your question about what could lead us to the high or low end of our guidance, that relates to the conditions in end markets as well. For our Tier 1 customers, we notice spending patterns affected by layoffs, portfolio prioritization, and prolonged decision-making for new bookings. This trend with Tier 1 customers was evident in our Q4 results, even with strong execution, and we anticipate it will continue into 2025. As for Tier 3, we did see some progress in the funding environment for biotech last year, but the decision-making process after funding has taken longer than before. If we see improvements in these end markets, that would likely push us towards the higher end of our range, whereas any deterioration compared to 2024 would lead us to the lower end.

Understood. That helps. And maybe just to hit on the EBITDA side of the guidance to profitability side. Maybe you could give us a little more commentary on what incremental R&D investments you're looking to make in 2025 and also help us further understand the investments in Chemaxon, whether that's related to building out product more or just scalability or really a purely technology integration with your existing assets in the discovery space? Thanks.

Yes. Thanks Jeff. So, yes, we're calling for the margin to be between 30% to 32% as you had said and observed. That does represent some additional investment. And we've been talking about the investment necessary to continue the strong momentum we've seen with the software portfolio as well as the investment in AI. And so what you're seeing in margin is us continuing to make that investment in 2025. The other piece of it, I'd say, too, but it is a modest component is we brought on Chemaxon. We were thrilled to bring on the Chemaxon business starting in Q4 and we're going to be working on integration of Chemaxon throughout the year, and we expect exiting the year having Chemaxon at our margins. But obviously, this is just the beginning in Q4 and now into Q1 of 2025.

Understood. Thanks for taking the questions.

Our next question will be coming from Michael Cherny of Leerink Partners. Your line is open.

Hi, good afternoon. Thanks for taking the question. Maybe if I can just talk a little bit about the trajectory in the quarter and the outlook. I fully understand the dynamics you put in place relative to the tough market. I think we all see it, the very driven data points, but the bookings came through strong in the quarter. Can you give more color, Bill, what you're seeing from a wallet share perspective? You highlighted some of the large deals. But as you think through both the formats in quarter and what's underlying guidance, how much of that do you think is you being able to garner a bigger piece of your customers' wallet?

Yes. Thanks for the question. I think there's an element of that in there. We have invested over the last couple of years in several new products and a whole lot of updates to products, which have resulted in, I think, very positive feedback from customers in terms of the bookings and additional sales that we got from them. And I think that's one of the reasons why we're emphasizing as we go into 2025, continue to invest, particularly in the software suite there's tremendous opportunity for us in front of us around what we're doing in AI as well as continuing to invest in our core products like Simcyp and in Pinnacle 21, which the investments we're making there are kind of taking us into new parts of pharma where maybe there were few models available, and we're opening them up as addressable to the company right now. Like John said, I think a chunk of fourth quarter was good execution by the team, but it wasn't just in the fourth quarter. I mean, some of this had to do with, I think, some careful investment in the products themselves that have led to taking a little bit more share like you're talking about.

Thanks, Bill. And then I guess another kind of big picture question, but an important one. As you think through the incoming new administration, obviously, we're all waiting to see where the confirmations lie. But what do you see at least based on public commentary, people's backgrounds as the opportunities and risks relative to the new administration coming in?

Yes. I was figuring we would get questions like that since everybody is getting them. I think right now, we are watching carefully. There are some potential opportunities as well as risks in what's being discussed. But I think to be fair, you'd have to say that it's all pretty new, and we're just kind of watching to see how things settle out before we make any pronouncements or plans around that.

And one moment for our next question. Our next question will be coming from Max Smock of William Blair. Your line is open.

Hi. It's Christine Rains on for Max. Thanks for taking my question. So we noticed the tick down in your software net retention rate to the lowest we've seen in a little while. Hoping you can speak to the drivers behind this? And if there has been any change in your win rate, just wondering if the downtick is a reflection of choppy large pharma demand. And more broadly, if you can comment on the overall growth in leading demand indicators strength delta between large pharma and small biotech in 4Q and expectation for both cohorts in 2025?

Thank you for your question. The net retention rate for the fourth quarter was $106 million, while for the full year it was $108 million, indicating a decrease in Q4 compared to the annual figure. We believe this is mainly due to the spending patterns of our Tier 1 customers. As I mentioned regarding our guidance, the upper and lower ends reflect these spending behaviors, which include slower decision-making, changes in portfolio priorities, and reductions in headcount that have affected renewals for our Phoenix product, and somewhat for Pinnacle as well. Conversely, Tier 3 customers have shown strong performance in both software and services, particularly in biosimulation services.

Thank you. That was really helpful commentary. Just digging a little bit more into 2025 and organic growth expectations. So in the midpoint, if I think about $24 million in total from Chemaxon contribution this year, about three-fourth of which is inorganic. That implies $18 million in organic revenue this year. The midpoint of your guide then implies about like 4.5% organic growth in 2025 versus around 2% in 2024. First, just wondering if this is the right way to think about organic growth this year. And you mentioned that you're expecting the environment to be the same this year versus last year. So how we should think about drivers behind the delta of around 2% in organic growth this year versus the midpoint or guide calling for about 4% to 5%. Thanks.

Yes. So I think to cut through it, the organic growth based on our guidance, so we said guide was 8% to 10% reported growth. The organic underlying that would be 4% to 6%.

Okay. Great. Thanks. That's really helpful. And then so given the 4% to 6%, how do you think about the step up there and the drivers behind the step up in organic growth rate versus 2024, given your expectation for kind of a relatively stable demand environment?

Right. I think one of the key drivers there is underlying our assumption within services, where we had a decline in regulatory in 2024, which we've laid out and embedded within our guide is a reg business that's flat to low-single digits.

And one moment for our next question. Our next question will be coming from David Windley from Jefferies. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I wanted to follow on the Chemaxon questions. John, would it be possible to quantify the margin differential or alternatively kind of how much margin in the guidance – how much margin drag from the Chemaxon inorganic addition? How should we think about that?

Yes. So Dave, the way to think about that is we stepped down off of 2024 by about 100 basis points. Approximately half of that is related to Chemaxon, and the other half is related to incremental investments.

Okay. And then maybe more broadly on Chemaxon. What's the competitive landscape for Chemaxon on to the capabilities that it has in that discovery space? And how is that perhaps different from your competitive position in PB/PK and PK/PD?

Yes, thanks, David. The discovery space is quite fragmented. Chemaxon offers a range of tools that address the design, make, test, analyze cycle, as well as chemical predictors and other tools for searching extensive chemical databases. These tools are integrated throughout the industry. While they each face individual competitors, there isn't really a comparable entity to Chemaxon in the market.

If I expand on this a bit, looking back to Pinnacle 21, one of the main reasons for these acquisitions is to create a portfolio that offers synergistic benefits, enabling clients to utilize our entire portfolio and our investment in cloud services. In the context of Pinnacle 21 and perhaps Formedix, it's about assisting clients in managing their data more effectively, making it easier to use simulations and model-informed drug development. Is it feasible to see this evolution occurring? Are you noticing these benefits as you engage with clients and support their deeper integration of model-informed drug development?

Yes, that's a great question. We've been working on biosimulation for a while and have gained recognition in niche areas of pharma. The plans to build an integrated platform applicable across various stages of drug development, starting from discovery, have attracted significant interest. We still have investment to make to bring all these tools together. However, we've made a solid start with Certara Cloud, which is aiding our discussions with higher-level pharma executives. We have excellent tools, but our goal is to transform them into a comprehensive platform that integrates the entire process of drug development from beginning to end. As we achieve this, we will create and capture significantly more value.

Right. I'll ask one last question that builds on that answer. Last year, we discussed investments in SG&A and R&D, and considered transitioning to a cloud approach. The first half of that year faced more pressure compared to the second half. Some investors might believe that the margin pressures seen in the second half of 2024 could serve as a starting point for thinking about your future margins. However, additional investments and margin pressures in 2025 might come as a surprise. How should we consider the duration of what I would call excess investment as you evolve toward a platform and enhance your capabilities?

We view Certara as a highly profitable company with a proven ability to maintain a high profit margin. However, we see significant growth opportunities and plan to reinvest some of our profits into expanding our software offerings. Our goal is to enhance the company’s growth rate over the next few years. While it’s challenging to provide specific details, we have a pipeline of new products, with several launches expected this year and more planned through 2026. After that, we will assess our progress and determine our future direction. Currently, we have a two-year plan in place, and it’s not just about investing money without a strategy. We have a steady stream of product upgrades and new AI-enabled features coming, and we anticipate revenue increases from these developments as we move forward.

Our next question will come from Constantine Davides of Citizens Securities. Your line is open.

Thanks. Just John, one more kind of modeling follow-up. Is there anything from a quarterly cadence standpoint that you'd call out in terms of headwinds or tailwinds that we should be mindful of in 2025? I guess first, I'm thinking of Chemaxon, just if that steps down from the pretty strong fourth quarter into the first quarter the way software typically does. And I guess obviously, the ramp of margin for that asset throughout the year. But is there anything else that you think you'd like to highlight just in terms of quarterly progression?

I believe we have historically been more weighted towards the second half of the year when considering the first half and second half, and I expect that trend to continue this year as we experience the usual seasonal patterns that occur in our fourth quarter. So in addition to what you mentioned, Constantine, it's important to also keep the first half and second half balance in mind.

Great. And then just on the regulatory services uptick, and I apologize if I missed that, but can you just maybe expand a little bit on the rebound there? And I know you're kind of limited in what you can address with the process that's going on, but does that sort of uptick? I know it's only one quarter, but maybe change how you're thinking about moving forward with that?

I will begin with the performance aspect. We were pleased to see the regulatory business return to growth in both bookings and revenue in the fourth quarter. This growth primarily stems from our Tier 1 customers, although there was some softness in Tier 2 and Tier 3. This indicates we still have strong support from our large Tier 1 customers. The business has returned to growth, and since those bookings are part of a services business, they will influence revenue as we move into 2025. We are satisfied with this recovery after the first three quarters.

And one moment for our next question. Our next question will be coming from Andrew Moss of Bank of America. Your line is open, Andrew.

Great. Thanks for taking my question. So, William, you've noted high expectations for CoAuthor in the year ahead and the potential to expand the offering. Can you provide any color on the CoAuthor traction and how large the opportunity might be to expand the current AI offering?

That's a good question. We have several paying customers, and we believe the product is progressing well after just a few months in the market. Our pipeline looks promising as well. From a competitive perspective, we have developed a robust product that appears to be fulfilling market needs. Over time, the product will evolve. There are numerous regulatory requirements, and the first version addresses part of them. Like all software, we will continue to release new versions this year, adding features and document types. We aim to significantly reduce the time required to create a new document, potentially by over 60% for the initial draft. While human input is still necessary for reading and editing, this process can greatly lower the initial costs of preparing a regulatory document. The product does more than just writing; it also manages data, tables, and connections to other databases. It's more comprehensive than simply applying CoPilot or ChatGPT to regulatory writing. I expect it could generate millions of dollars in revenue this year. I won't provide more specifics about any one product, but it's a legitimate offering and will be a key revenue driver. The long-term potential is harder to predict due to rapid advancements in AI, but this product is advancing quickly and has many opportunities as we continue to develop it.

And one moment for our next question. Our next question will be coming from Kyle Crews of UBS. Your line is open, Kyle.

Hi. Thank you for taking the questions. I think you earlier said that you're expecting a low single-digit to flat decline in regulatory services revenues this year. Could you maybe help us with the segment guidance? I believe that piece of information almost implies around a high single-digit growth rate organic for the software business? And maybe if you could just provide more color on the organic growth guidance for each business line?

Yeah, sure. Let me clarify first on regulatory. What I said for regulatory is that we expect the business in 2025 embedded in our guidance is flat to low single-digit increase. But to come back to your question on sort of the component parts here, so we said the reported was 8% to 10% growth. I had mentioned earlier that the organic total company was 4% to 6%. When you split that by software and services, then you could see services would be low single-digits. So think of it as 2% to 4%. Software, including Chemaxon, would be 16% to 19% growth. But the organic, and to your point, Kyle, the organic software growth would be in a range of 6% to 8%. So that is aligned with what you were saying earlier.

Great. Thank you. And then maybe could you provide some color on your efforts to expand the Simcyp software outside of the core consortium to other customers?

We have several ways to deliver Simcyp. Our core consortium has been very strong, and we also sell the software directly to various customers outside the consortium, which is on the rise. Additionally, we have a team that uses Simcyp to carry out projects for customers who may be too small or lack the internal resources, and this area has also seen significant growth in recent years. I view it as a single tool serving multiple customer segments with various delivery methods. Furthermore, we are beginning to integrate Simcyp with our QSP software, which I believe will create more opportunities to enhance our existing customer base. Initially, QSP was mainly a consulting business, but we are heavily investing in its modeling software, leveraging our existing capabilities from Simcyp, and we plan to continue that investment this year.

Our last question will come from Vikram Purohit of Morgan Stanley. Your line is open.

Hi. Thank you for taking our question. This is Park on for Vikram. Just you guys touched on investments you're making in AI and software. Could you provide us your current view on BD and kind of which profile of assets could be interesting to fold into the company at this point?

Yes. We have the financial capacity to continue pursuing mergers and acquisitions and are consistently exploring opportunities in that area. We have stated our focus on software. While we are actively engaged with the numerous acquisitions we've made recently, we still have the ability to pursue additional strategic investments if we choose to do so.

And this concludes today's conference call. Thank you for participating. You may now disconnect.