Earnings Call Transcript - CERT Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Certara Third Quarter 2025 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, Investor Relations. Please go ahead.

David Deuchler, Investor Relations

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 September 30, 2025. 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 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 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, November 6, 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'll turn the call over to William.

William Feehery, CEO

Thank you, David, and good afternoon, everyone. Thank you for joining Certara's third quarter earnings call. John and I will begin with prepared remarks, and then we will take your questions. During the third quarter, our team continued to execute against our 2025 goals, while also positioning Certara for long-term success by investing in our R&D and commercial teams. Third quarter revenue of $104.6 million was in line with our expectations, representing 10% reported year-over-year growth. We outperformed internal profitability expectations, delivering adjusted EBITDA of $35.2 million, representing a margin of 34%. Our team remains focused on investing for growth with R&D up 24% versus the same period a year ago and increasing to 10% of revenue from 9% in the prior year period. On the other hand, third quarter bookings of $96.6 million came in below our expectations, representing growth of 1%. Among our Tier 1 services customers, we observed cautious spending behavior with some customers pushing deal timelines later into the fourth quarter and into 2026. Taking this into account, we are narrowing our revenue guidance to $415 million to $420 million, which we believe reflects the most likely range of outcomes for the year based on our performance to date. We have raised our adjusted EBITDA margin guidance to the high end of our previous guidance range and raised our adjusted EPS guidance to reflect the continuation of outperformance against our profitability targets and the impact of share repurchase activity. We continue to see pockets of outperformance throughout our portfolio, including our Simcyp PBPK software and our QSP services. However, some of our customers are still dealing with factors that impact decision-making timelines and R&D allocation decisions. As large pharma customers adjust focus with their R&D programs and now onshoring initiatives that are impacting personnel and resource allocations, we have seen a slowdown in deal completion timelines, particularly in regulatory services and biosim services. This slowdown has persisted into the beginning of the fourth quarter, conflicting with historical seasonality trends. We are closely monitoring consumer spending patterns as we begin to plan for 2026. At a high level, we continue to see several positive leading indicators for the biosimulation market and for Certara. Among large pharma customers, the use of model-informed drug development is growing throughout all stages of development. Customers are adopting biosimulation solutions for use in dosing, efficacy and toxicity analysis and using the technology earlier as we expand our software capabilities into discovery and preclinical. Among our smaller customers, the adoption of biosimulation is accelerating through the use of our technology-enabled services. As drug developers look to optimize their speed and efficiency, they are often attracted to areas of our business such as QSP, which can help streamline decision-making and trial design in both the preclinical and clinical stages. Since our IPO, we have seen a significant increase in both the number of customers using our products and services as well as the wallet share of Certara within larger organizations. Most of all, we are encouraged by our evolving relationships with key stakeholders and users at customers. Earlier this year, we hosted our second annual Certainty Conference, bringing together hundreds of our users to discuss the future of model-informed drug development. In early October, we held the same conference in Barcelona with our European user base, and the experience was very productive for all parties. At both events, I had the opportunity to discuss Certara's products with customers where they provided feedback on our software, suggested new features and functionality and learned about our new products and long-term vision for the Certara platform. There is tremendous value that can be gained by making more informed decisions earlier in the drug development life cycle, which is why we are moving into discovery and preclinical. We closed the Chemaxon acquisition a year ago in early October of 2024, which gave Certara an established product suite in discovery with synergistic capabilities relative to Simcyp. In the first 12 months under Certara ownership, Chemaxon has continued to grow and is on track to reach corporate average margins by the end of the year. Elsewhere, our services group has grown preclinical work in QSP, especially since the FDA's guidance promoting the use of new approach methodologies. QSP has grown ahead of the rest of the biosimulation business on a year-to-date basis and is becoming an increasingly important part of our business. Now turning to our financial performance. In software, bookings of $40.8 million represented growth of 17%. We saw solid bookings performance in Tiers 1 and 3, which were in line with expectations, while Tier 2 was below expectations, which we attribute more to timing than anything. Software revenue of $43.8 million grew 22% on a reported basis and 6% organically, led by strong growth from Simcyp in addition to $5.6 million of contribution from Chemaxon. In services, bookings of $55.8 million declined 9% on a reported basis, driven by slowness in the Tier 1 customer base. We have continued to observe cautious decision-making among large pharma customers into the fourth quarter. Services revenue of $60.8 million grew 3% on a reported basis and on an organic basis, led by growth in QSP services. On the innovation front, 2025 has been our most active product development year since our IPO. We've embedded artificial intelligence into both our development processes and our products, accelerating the pace of new model creation following our Vyasa acquisition. We launched several major products this quarter. Pinnacle 21 Enterprise, a cloud-based upgrade, improving regulatory data compliance and submission speed. Phoenix Cloud, which transitions our customers from on-premise to Certara Cloud deployment and provides significant upgrades to product functionality; and CertaraIQ, our new software for QSP modeling designed to expand the use of biosimulation across discovery and clinical phases. Early customer feedback on these releases has been excellent, and we're confident they strengthen our long-term software growth engine. Last year, we announced the strategic review of our regulatory services business. To date, we have made significant progress in our evaluation, including dialogue with external parties and significant internal analysis of best practices. As we evaluate our business, we recognize that regulatory writing performance has been inconsistent. Simultaneously, we value the regulatory writing business' ability to generate cash, which we have used to invest in growth and support recent share repurchases. At this point in time, we are in the final stages of our process and intend to share a definitive outcome before the end of 2025. To close, we remain focused on delivering our 2025 plan and entering 2026 well prepared to capitalize on the opportunities ahead. Although we are seeing some variability in Tier 1 services, we are encouraged by the widespread momentum of biosimulation adoption in drug development.

John Gallagher, CFO

Thank you, William. Hello, everyone. Total revenue for the 3 months ended September 30, 2025, was $104.6 million, representing year-over-year growth of 10% on a reported basis and on a constant currency basis. Total bookings in the third quarter were $96.6 million, which increased 1% from the prior year period on a reported basis. Trailing 12-month bookings were $471.4 million, increasing 12% on a reported basis. Excluding Chemaxon, total company organic bookings declined 4% compared with the third quarter last year. Software revenue was $43.8 million in the third quarter, which increased 22% over the prior year period on a reported basis and 21% on a constant currency basis. Organic growth was 6% in the quarter, driven by strong growth from Simcyp. Chemaxon contributed $5.6 million to our reported revenue, which was in line with our expectations. Ratable and subscription revenue accounted for 65% of third quarter software revenues or 71% excluding Chemaxon, slightly down from 72% in the prior year period. Software bookings were $40.8 million in the third quarter, which increased 17% from the prior year period. Third quarter bookings included $4.2 million of Chemaxon bookings. Organic software bookings grew 5% versus the prior year. Trailing 12-month software bookings were $187.9 million, up 23% year-over-year. And the software net retention rate was 104% in the quarter, consistent with our full year plan. Looking at our software bookings performance by tier, we saw strong performance in Tiers 1 and 3, driven by the continued adoption of our software. In Tier 1, we saw some timing-related slowness due to renewals, which we expect to normalize in the fourth quarter. Now turning to services revenue, which was $60.8 million in the third quarter, up 3% versus the prior year period on a reported basis and on a constant currency basis. We saw strong performance from our QSP and Simcyp services businesses in the quarter, which was partially offset by softness in the regulatory services. Technology-driven services bookings in the third quarter were $55.8 million, which declined 9% from the prior year period. TTM services bookings were $283.5 million, up 6% as compared to the prior year. During the quarter, we saw softer performance from Tier 1 customers and biosimulation services, driven by spending hesitancy among our largest customers. In regulatory, bookings declined in the double digits, while biosim services were down low single digits. Total cost of revenue for the third quarter of 2025 was $39.7 million, an increase from $37.2 million in the third quarter of 2024, primarily due to higher software amortization and consulting expenses, offset by lower employee-related costs. Total operating expenses for the third quarter of 2025 were $61.9 million, an increase from $55 million in the third quarter of 2024, primarily due to higher employee-related costs in sales and marketing and R&D. Adjusted EBITDA for the third quarter of 2025 was $35.2 million, an increase from $33.1 million in the third quarter of 2024. Adjusted EBITDA margin in the quarter was 34%. Wrapping up the income statement. Net income for the third quarter of 2025 was $1.5 million compared to a net loss of $1.4 million in the third quarter of 2024. Reported adjusted net income for the third quarter of 2025 was $22.2 million compared to $20.3 million for the third quarter of 2024. Diluted earnings per share for the third quarter of 2025 was $0.01 compared to a loss of $0.01 per share in the third quarter of 2024. Adjusted diluted earnings per share for the third quarter of 2025 was $0.14 compared to $0.13 per share in the third quarter of last year. Moving to the balance sheet. We finished the quarter with $172.7 million in cash and cash equivalents. As of September 30, 2025, we had $293.1 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Subsequent to the end of the quarter, we executed a reprice of our outstanding term loan, which is expected to save $700,000 annually in interest expense beginning in 2026. Earlier this year, our Board authorized a $100 million share repurchase program. We have repurchased approximately $41 million of stock during 2025. With year-to-date results and our outlook for the fourth quarter, we are providing the following guidance for 2025. We are narrowing the revenue range to $415 million to $420 million, representing 8% to 9% growth compared with 2024. We expect Chemaxon to contribute software revenue of $23 million to $25 million. We expect an adjusted EBITDA margin around 32%, which is the high end of our previous guidance range, reflecting outperformance versus our internal profitability expectations to date. We expect adjusted EPS in the range of $0.45 to $0.47 per share, fully diluted shares in the range of 160 million to 162 million and a tax rate in the range of 25% to 30%.

William Feehery, CEO

Thank you, John. To summarize our message today, our team is working diligently to execute our growth and profitability goals despite a mixed operating environment. We are excited to bring several new products to market and look forward to providing further updates on our progress early next year. Operator, can you please open the line for questions?

Operator, Operator

Our first question comes from Michael Cherny from Leerink Partners.

Daniel Christopher Clark, Analyst

This is Dan Clark on for Mike. Just wanted to ask a little bit on the Tier 1 services revenue or bookings dynamic in the quarter. I guess, one, when did you start to see a slowdown in decision-making timing? And of the potential deals that got pushed, I appreciate the color on some of them hopefully closing in 4Q with the remainder in 2026. How are you kind of thinking about that split at this point?

John Gallagher, CFO

Yes. As it relates to the bookings, so it was our Tier 1 services customers where we saw delays. And what we're seeing is hesitancy to a slowness in decision-making. And a lot of times, we would talk about that as impacting timing and trickling into the next quarter. But what we just said in the prepared remarks, though, is that through the month of October, we continue to see some deceleration in Tier 1 services bookings related to these larger customers of ours. And as a result of that, we're expecting it to continue in Q4.

Operator, Operator

Our next question comes from David Windley from Jefferies.

David Windley, Analyst

Hopefully, you can hear me. I'm in the car. I was hoping you could comment or disentangle the gross profit outperformance between mix and perhaps efficiency, productivity?

John Gallagher, CFO

Thank you, David. On the gross margin line, we've definitely observed some productivity, particularly when compared to last year. You may remember that we made some reductions on the services side last year, which affected our cost of sales. We're still comparing to that in the third quarter of this year, and this productivity significantly contributes to the acceleration in gross profit. Additionally, we're achieving a higher mix of software sales, which has a greater gross profit compared to services. So, we're not only seeing improved productivity on the cost of sales for services, but the shift toward software also supports our gross profit growth.

David Windley, Analyst

I was going to ask my next question about your areas of innovation, but it relates to what you've mentioned. You spoke about CertaraIQ being your more AI-enabled QSP and the launches of Phoenix Cloud, which seem to be well received. In the prepared remarks, you noted that QSP is your fastest-growing area. Could you elaborate on that? Currently, it appears that most of QSP is service-driven, but you're introducing a more technology or software-driven QSP. How do you see that evolving? Will the growth in QSP affect the software mix until technology catches up? I'm interested in how QSP fits into this since you emphasized its growth.

William Feehery, CEO

Yes. Thanks, David. This is Bill. We are executing the strategy that we set out to do when we acquired Applied BioMath about whatever it was, about 2 years ago, which was to take QSP and to bring a software platform to it, and that is CertaraIQ, which we launched, as you pointed out. So there's a huge demand for QSP. Some of it has to do with the recognition that this type of modeling has been quite useful now that the FDA has made its announcement on NAMs and on reducing the number of nonhuman primates. And some of it has to do with the growth in biotech or in large molecules where QSP has been particularly valuable. We're attempting, and I think we will very much succeed with this product to create a standard product that QSP modelers use not just within pharma companies, but also as they go forward and submit their models for approvals to regulators. There's a big need in the market for this, and there's a big opportunity to make QSP a lot more widespread by improving the efficiency of modeling, which we can do with AI and providing a platform where our consultants are much more efficient, providing the same platform so that our pharma customers are using the same platform internally and can also drive that kind of same efficiency, and we can get work going back and forth. And then finally, this is an opportunity for us to create foundational models in particular therapeutic or drug modalities that we can sell over and over again using this software platform. So there's multiple ways that this will benefit the company financially as we go forward. There's nothing like it really on the QSP market. There's obviously modeling tools out there, but we believe this is a significant advance. It's been well received. We only launched it a couple of weeks ago. So it's a bit early to talk about the financial success, obviously, but we expect as we go into 2026, this will be a success for the company.

Operator, Operator

Our next question comes from Matt Hewitt from Craig-Hallum Capital Group.

Matthew Hewitt, Analyst

I apologize, I'm having to hop between a couple of different calls. But first off, I recognize that there's some challenges or hesitancy with your Tier 1 customers. I'm just curious if you've heard or seen any change since we got a little bit of clarity on the most favored nation pricing and what that could mean, some clarity on the tariffs and what that impact could be. I mean we've heard from a few other companies that post some of those initial most favored nation type contracts or changes that pharma was kind of reengaging. Is that similar to what you're seeing? Or any color along those lines?

William Feehery, CEO

Yes, thank you. This is Bill. We have also heard other companies discussing this and have gotten some feedback from customers. I would say we are cautiously optimistic about this recent development. We need to observe how it plays out in the marketplace. However, any indication of macro stability among Tier 1 customers and what is happening with pricing would ultimately benefit us and hopefully lead to a better environment as we approach 2026.

Matthew Hewitt, Analyst

Got it. And then maybe just as a follow-up, and I realize it's still very early, and we haven't even closed out this year yet. But as you're talking to your customers, not only about the remainder of fiscal '25, but as they're starting to think about their budgets for fiscal '26, are you getting any sense for where those budgets may be going? Any sense for how modeling and simulation kind of fits into those budgetary plans for '26, recognizing, yes, it's early days, but having gone through this now for a while, I sense you guys might have a feel for, okay, if we're hearing this at this stage, that bodes well for the final budgets when they're announced later this year or early next year.

William Feehery, CEO

We only have some anecdotes regarding the overall industry. However, I believe some of our new products have been well received, and companies are indicating that they will allocate budget for them as they plan for 2026. It seems the pullback in services is not uniform across the industry; while Tier 1 companies are showing some hesitance due to the macroeconomic environment, we are performing well with Tier 3s, particularly with biotechs. Every time we encounter positive signals of stability, it brightens our outlook. We are looking forward to what we expect to be a stabilizing environment as we approach 2026, in contrast to the challenges we've faced during parts of this year.

Operator, Operator

Our next question comes from Luke Sergott from Barclays.

Brendan Smith, Analyst

Actually, I just wanted to follow up on some of the earlier questions related to the software business a little bit more. And this is frankly something we're just asked by investors a fair amount. But I guess we're obviously seeing pharma and some of those Tier 1 customers invest a lot more internally in some of their own AI plus capabilities. And I guess, do you kind of feel that's net-net headwinds, tailwinds, maybe a wash to where you guys come out? Just trying to understand like to what extent as they build out those capabilities, they turn to you all to help make sure that those internal processes are ramping as they should? Or is it kind of an or rather than an and within their budgets just based on your conversations?

William Feehery, CEO

Thank you for the question. The developments we’ve seen in AI have been remarkable. Over a year ago, there was significant excitement and a willingness to experiment in the pharmaceutical sector, but there was also some hesitation to engage in enterprise sales until the full implications of AI, particularly concerning data security and product usage, were understood. Initially, there were excellent marketing opportunities, but sales were slow. However, as we progressed through 2025, we noticed an increase in actual sales of pure AI products. All our recently launched products, such as Phoenix and CertaraIQ, now include integrated AI, which has been positively received. We are observing greater readiness to implement these solutions across enterprises. Regarding whether pharmaceutical companies are considering developing our core products using AI internally versus purchasing them from us, our core modeling technologies are highly specialized, making internal development less feasible. This is reflected in the steady growth of our software, which we anticipate will remain strong as we move into 2026.

Operator, Operator

Our next question comes from Joe Vruwink from Baird.

Joseph Vruwink, Analyst

Just to go back a couple of questions ago, you mentioned the prospect of stabilized environment for 2026. What do you think stabilized means for Certara growth potential at this point? And I just ask as the last 3 years have obviously seen a lot of macro turbulence, Organic growth has averaged 3% to 4% over that stretch of time. Is stabilized supportive of mid- to high single-digit growth and robust gets you back to the double digits? Or any way directionally, just appreciating kind of what the company has been through over recent history?

John Gallagher, CFO

Yes, Joe. When we refer to a stabilized environment, we mean that the software side of our business is performing as expected this year. Year-to-date software bookings have increased by 7% on a trailing twelve months basis and 6% year-to-date. We also anticipate growth from the new products that Bill mentioned. However, the challenge we face is in our services sector, which is evident in our Q3 results and has continued into October. As we look toward the end of this year, we do not expect the same seasonal trends we have experienced in previous years, leading to a lower starting point for services as we move into next year. Consequently, we anticipate that services will grow in the low single digits. Overall, while our software is progressing well and aligning with our plans, we remain focused on the services area as we approach 2026.

Joseph Vruwink, Analyst

Okay, that's helpful. To revisit David's question about gross margin, I've noticed that this year's increase in software sales is primarily due to higher license sales rather than subscriptions. Is this a favorable margin mix for year-to-date results, or how should we compare it to a greater share of recurring subscription revenue?

John Gallagher, CFO

Yes, you've got that straight, Joe. So bringing in Chemaxon, Chemaxon is predominantly a license based, at least right now. So whenever we're recognizing revenue there, we're getting all of it at once. And so that, combined with Phoenix achievement on revenue this year is what's helping the gross margin, if you will, from that perspective, while at the same time, it's reducing the proportion of ratable that we have. And that's why I like to cite it not just what the ratable portion of software is, but even excluding Chemaxon is a better comp to the prior year.

Operator, Operator

Our next question comes from Kyle Crews from UBS.

Kyle Crews, Analyst

You mentioned that customers were adopting model-informed drug development for use in toxicity and dosing analysis. CBR earlier in October here announced that you could use potentially pharmacokinetic analysis to replace some animal testing for first-in-human dosing. Can you elaborate a bit more on that point that you made earlier in the call?

John Gallagher, CFO

Yes. One of the main applications of QSP has been in two key areas. Firstly, the initial dosing during first-in-human trials is particularly important for pharmaceutical modeling. While it may not seem like a major issue, the first dose tested in a Phase I trial sets the parameters for all subsequent trials. If the doses tested are outside the effective or safe range, that effort is essentially wasted. This has been acknowledged by many companies in the pharmaceutical sector, and it's also encouraging to see regulators taking note and supporting this approach. This recognition has contributed to the increased demand for modeling services like QSP that we've experienced.

Kyle Crews, Analyst

Great. Can you speak briefly on your exposure to biologics or small molecule drugs at this point with your software offerings?

William Feehery, CEO

We have exposure to both small and large molecules. Our exposure is quite similar to the overall pharmaceutical industry at any given time. The questions involved in modeling small molecules and large molecules can differ significantly. For instance, small molecules often involve formulation and absorption questions, while large molecules usually raise issues related to dosing and immunological responses. Nonetheless, we have products aimed at both categories and maintain strong and active businesses in both sectors, along with other technologies that may not fit neatly into these classifications, such as radioligands and peptides. Overall, we are well-equipped in terms of exposure and investment in the technology to address both areas effectively.

Operator, Operator

Our next question comes from Max Smock from William Blair.

Max Smock, Analyst

John, maybe just want to follow up on some of your earlier commentary around services bookings, particularly in Q4. I think you mentioned you haven't seen much improvement or you didn't see much improvement in October. Just kind of looking back historically, I typically see a 30%, 40% sequential increase in bookings in Q4. Can you just kind of frame out, given the volatility quarter-to-quarter here, how you're thinking about just kind of the range of outcomes on the services bookings in Q4? Just to give us some more color around what the organic growth of that segment can look like in 2026.

John Gallagher, CFO

Max, so we do still expect from Q3 into Q4 a sequential increase, but not to the same magnitude that we've seen historically. Historically, you've seen a book-to-bill in Q4 that's 1.3 to 1.4, and we don't anticipate that being the case given what we've seen through October.

Max Smock, Analyst

That's helpful. Maybe just one on the margin side. Really nice performance in the quarter. And I know in the past, you talked about maybe pulling back on some of your investments if the macro environment got a little bit more challenging. Just want to make sure that, that wasn't a factor that contributed to the beat on margins in the third quarter here. And then as we're thinking out in 2026, can you just talk about how you're kind of prioritizing the opportunity that you have here to continue to advance or invest in your pipeline versus prioritizing margin expansion? And just your initial thoughts on how we should be thinking about margins moving forward?

John Gallagher, CFO

Yes. Yes. So definitely not pulling back on the investments, and you can see that reflected in the 24% growth in R&D year-on-year. So we're continuing to make those investments. Good discipline across the rest of the P&L. We talked a little bit about gross profit. But if you exclude Chemaxon from the expense lines, you'd see that they're in line or lower than growing at the rate of sales. So I'd say, yes, making the investments, absolutely. You can most notably see that reflected in the R&D line as you would expect. And there is more investment to come as we look at next year. But we've been pleased with our ability to navigate both making those investments in software development while also preserving our margin.

Operator, Operator

Our next question comes from John Park from Morgan Stanley.

Unknown Analyst, Analyst

I was wondering, I know you guys talked about Tier 1 and some of the macros that they're facing. I was wondering if you could talk to Tier 2 and Tier 3, acknowledging that they make up a smaller portion of the revenue, but is it any different in terms of some of the macro headwinds that Tier 1s are facing?

John Gallagher, CFO

Yes, that's a bright spot for us actually. So Tier 3, both Tier 2 and Tier 3 services have had good growth throughout the year. And in fact, in Q3, we saw double-digit growth in biosim services Tier 3. So this has been a partial offset to the headwinds that we've been describing in Tier 1 has been the positive growth and momentum that we have in Tier 2 and most notably in Tier 3.

Unknown Analyst, Analyst

I know you work with the FDA, and I was curious if the government shutdown has any implications for the FDA or any other agencies you collaborate with.

William Feehery, CEO

Yes. Thanks for the question. It's I guess the question revolves around how long it lasts. I think most people in the pharmaceutical industry believe that this will resolve itself at some point and that point will be less time than causes serious issues. It goes on for a really long time, and we have a big slowdown in drug approvals or something, that's one thing, but I don't think that, that's really what people believe. There's a little bit of slowdown in terms of any kind of contracting with the government, but we don't expect that will have a significant effect on the year.

Operator, Operator

Thank you. I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.